What is Capital Preservation?

Investing can be an attractive way to grow your wealth. However, it’s risky and can lead to short-term losses. These losses may be balanced by long-term growth. However, growth is not guaranteed.

Some investors have less risk tolerance and can’t afford or stomach major losses. This might be the case if you have limited capital, are saving for a short-term goal or are in retirement. Such investors may use a capital preservation strategy, which aims to reduce losses through careful and conservative investing. 

How Does Capital Preservation Work?

Since the goal of capital preservation is to reduce losses, many investors choose to invest in short-term, safe investments. These may include Treasury bills, CDs and high-yield savings accounts. Typically, investors will grow their wealth by choosing securities that will provide quick payouts in the form of interest payments or dividends. 

Through these safe investments, investors can grow their wealth without risking substantial losses. However, it’s important to note that these returns will be modest compared to the potential reward offered by riskier investments. 

Types of Capital Preservation Investments

Individuals interested in capital preservation can find many investment options. These investments range in liquidity, risk and returns. Here are just a few investments that can generate returns with very little risk.

Treasury Bills

Treasury bills are short-term securities offered by the U.S. Treasury. They range in investment horizons, offering bills that mature anywhere between four weeks and one year. Since they are backed by the U.S. government, there’s very little risk associated. However, the funds cannot be accessed until the bill matures. Their low minimum investment also makes them accessible to many investors. A T-bill can be bought for as low as $100 and go up in increments of $100.

Certificate of Deposits

Certificates of deposits (CDs) are similar to a savings account but offer higher interest rates and are less liquid. Investors put money in a CD account that has a set interest rate and investment horizon. While in the account, investors will gain interest on their investment. However, once in the account, the capital can’t be touched until the CD matures. These are also risk-free, though they generate very modest returns.

Money Market Accounts

Money market accounts are a type of high-yield savings account, although they typically require a larger sum of money to be left in the account to gain interest. The interest rates of money market accounts are higher than most savings accounts and therefore generate more returns. Money market accounts are insured by the FDIC or NCUA, making them a very safe investment option.

Who is Capital Preservation Investing Best For?

Capital preservation strategies are best for investors who want to grow their savings and capital but don’t have a large appetite for risk. Such investors could include retirees trying to make the most of their retirement savings, investors saving for a specific goal such as a house or car or investors with limited capital. It can also be good for beginner investors who aren’t ready to invest in the stock markets.

Growth Investing vs. Capital Preservation

The opposite of capital preservation is growth investing. While capital preservation accepts modest returns to avoid risk, growth investing involves risky investments with the potential for higher rewards. While partaking in a growth investing strategy, investors buy stocks that have a higher-than-average growth rate. There’s the opportunity for large returns, but it comes with a much higher risk for loss.

Things to Consider with Capital Preservation Investing

Before deciding on a capital preservation strategy, check out these factors to ensure it’s the best strategy for your goals and situation.

Risk and Volatility Levels

Capital preservation is typically used by investors who want less risk to preserve their capital. They choose investments that have little or no chance of loss. These investments withstand market volatility, which makes them safe. However, this may not be the best strategy for investors who have a larger risk appetite, since they could get larger returns from riskier investments.

Safety of Investments

To preserve capital, investors need investments that will remain safe and steady even during times of market volatility. Options like CDs, money market accounts and Treasury bills remain safe options even during times of recession and market volatility. Interest rates may fluctuate, but investors will never risk losing their capital.

Low Returns

This strategy prioritizes safety over returns. Since risk and reward are intrinsically linked, low-risk investments will produce low returns. This is why investors with a larger risk appetite may not want to partake in capital preservation. Risk-averse investors may find low returns worth the security.

Impact of Inflation

While these investments won’t cause investors to lose money, they may become less profitable during times of high inflation or market changes. The low returns offered by these vehicles won’t go very far as prices rise, so they may not help investors achieve their goals. 

Secure Investment for Risk-Averse Investors

High-risk investments aren’t the only way to grow your money. Capital preservation strategies allow investors to reduce losses while still growing their savings through modest returns. However, these strategies aren’t for everyone and won’t provide the higher returns some investors crave. Before choosing an investment strategy, investors should conduct thorough research and consult their financial advisor with any further questions.

Frequently Asked Questions