Should Capital Preservation Be Part of Your Investment Strategy?
It can be somewhat scary out there right now for investors. With everything going on in Europe, and even here in the United States, there are a number of people concerned about what could happen to their nest eggs. Sure, the stock market is doing fine at this second, but volatility is high, and no one knows what piece of news will send the market reeling tomorrow, or next week, or whenever.
While it does no good to panic over a stock market dip, some people would like a little peace of mind, knowing that their capital is safe. This is especially true if you expect to retire sometime soon. One way you can build your safety net a little is to employ a strategy of capital preservation to some part of your portfolio.
Brief overview of capital preservation
Capital preservation is the practice of doing your best to protect the money that basically serves as your principal. Capital preservation is not about growing your wealth rapidly; it's about protecting what you already have.
This means that instead of investing in stocks, trying to grow your nest egg, you put your money where it is likely to be more secure. The returns are usually much lower, but you at least have the peace of mind knowing that your capital is safe.
Cash products and capital preservation
As a result, many people use cash products for capital preservation. You can keep your money in a high-yield savings account, or a money market account, or a CD.
It's important to make sure that you keep your money with an institution that is FDIC insured, though. The idea is to keep your money as safe as possible. For a number of people, that means cash.
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Issue of inflation eroding your capital
One of the issues with capital preservation, though, is the that inflation can erode the "real" value of your money. The amount that you have is preserved, but in some cases the interest you earn on a savings account is unlikely to beat inflation. As a result, in "real" terms, you could actually lose value, even though you have the same amount of cash.
For this reason, many people interested in capital preservation choose inflation adjusted investments that are supposed to be safe. Even with recent troubles due to the deficit and other issues, U.S. Treasuries are still considered some of safest investments in the world. Special Treasury notes called TIPS (Treasury Inflation-Protected Securities) can actually help you at least keep pace with inflation, keeping the purchasing power of your capital from being eroded by inflation.
Cash preservation and your bottom line
It's usually not a good idea, unless you have a lot of capital and are retiring soon, to apply a capital preservation strategy to a large portion of your portfolio. (Someone who expects to begin living on some of his or her income should consider converting a chunk of the portfolio to safe investments/products that won't be as affected by the vagaries of short-term market volatility.)
Instead, having a few safe investments/products is a good idea so that some of your portfolio is protected, but you should also consider investing in growth securities and products that can help you build your nest egg.
If you don't, your ability to retire could be placed in jeopardy, since you won't be able to amass wealth quickly enough to meet your retirement goals.
