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What is Preservation of Capital?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 January 2020
  • Copyright Protected:
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    Conjecture Corporation
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Preservation of capital is a type of investing strategy that has the ultimate aim of preventing a loss to the overall value of the investment portfolio. The idea is to achieve a level of diversity within that portfolio that makes it possible to offset occasional losses on some of the holdings with gains on other holdings. Establishing the benchmark for the portfolio value normally involves identifying the current rate of inflation. As long as the collective assets in the portfolio are keeping up with changes in the inflationary rate, a preservation of capital is said to exist.

Managing to create a portfolio capable of realizing a preservation of capital typically begins by diversification. That is, rather than relying too heavily on one particular type of investment, the portfolio is built utilizing several different kinds of investments. For example, rather than depending on stock options alone, an investor may also choose to hold several bond issues, some real estate, and possibly also a few commodities. While it is likely at any given time that gains on any one type of investment may lag a bit below the current rate of inflation, there is a good chance that one or more of the other investment types will be providing higher returns, allowing the complete portfolio to keep pace with inflation and possibly even make some gains.

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Even within the individual investment types that compose a given portfolio, considering the risk associated with each asset is key to the process of preservation of capital. This means that a savvy investor will hold shares of stocks that are very stable and have a low rate of volatility as well as some stocks that carry a greater degree of risk and potential return. In like manner, real estate holdings may include commercial as well as residential properties, making it possible to offset losses from one type of property with gains on the other. By carefully choosing investments that carry different degrees of risk, the investor has a much better chance of minimizing losses during just about any type of inflation or recession that may occur.

For individuals seeking to build a retirement nest egg, utilizing the preservation of capital to best effect is especially important. Combining a bit of conservative investing along with an equitable amount of speculation in investments with greater potential creates a foundation that helps to ensure an equitable amount of assets are available for use in later years while also providing the possibility of creating more wealth than necessary to maintain an equitable standard of living during the retirement years. In order to arrange a portfolio so the risk of ruin is kept near zero while the chances for considerable growth is maintained, seeking the advice of a professional investment counselor is often a good idea.

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