What is capital preservation?
At its core, a capital preservation investment strategy focuses on preserving capital and avoiding loss. This conservative approach to investment minimises risk, but also sees smaller returns. Instead, this money management philosophy conserves investment value, keeps pace with inflation and mitigates risk to maintain capital.
Investment objectives of capital preservation
For the right type of investor, at the right time, a capital preservation model can be extremely useful. It protects against market volatility and facilitates short-term access to funds.
This approach is often favoured by retirees, who may prefer the security of a low risk, low return strategy that is only designed to keep pace with inflation. Capital preservation can be a solution for short-term goals, such as ensuring the value of retirement savings can be retained. Sometimes, investors plan on using the money to help with day-to-day costs, such as paying bills, buying Christmas gifts for the grandchildren, enjoying leisure activities or helping their children to save for a deposit on a home.
Capital preservation does not, however, represent the best option for a longer term investment plan. In fact, over time, the exposure to risk can actually go up.
This can occur because the value made through capital preservation investments are unlikely to increase enough to offset the gradual diminution of purchasing power, resulting from even moderate rises in inflation. So while the capital remains, its value over a longer term can diminish.
This aside, a capital preservation based fund can, nevertheless, still be a valuable tool for investors pursuing longer-term growth by appropriately diversifying an investment portfolio.
Capital preservation examples
The best investments for capital preservation are usually fixed-income securities and other low-risk options, such as government and corporate bonds, as well as gold.
Stocks are inappropriate for investors with a capital preservation approach in mind, and likewise, long duration bonds are volatile and susceptible to swings in value, too.
Low exposure, modest gains and maintaining wealth are the guiding principles for capital preservation. While you are unlikely to see high paying returns, it is a price worth paying for those who do not want to suffer the potentially higher losses associated with more risky investments.
AXA-IM’s approach to capital preservation
At AXA, we assist use our expert knowledge and experience in intelligent risk mitigation to fulfil our clients capital preservation objectives. We work to achieve an effective level of investment performance, whilst preserving capital and mitigating possible losses.
Coping with financial market volatility: Lump sum versus regular investing tactics
Despite concerns over slowing global growth, the ongoing trade war and the prolonged uncertainty surrounding Brexit negotiations, the first half of 2019 has been relatively kind to investors. Having ...
Why diversification and ‘time in the market’ can matter
Periods of stock market volatility can be unsettling but dipping in and out to avoid any falls, could prove to be a costly mistake.
What the 2019 Rugby World Cup can teach investors about diversification – and volatility
While there will be one clear winner in the 2019 Rugby World Cup, other teams could still shine in their individual matches – and star performers can change over time and even disappoint. It’s ...