When Capital Preservation is a Good or Bad Idea
Posted by Ocean Wealth
The term “capital preservation” sounds a lot more complicated than it actually is. The real idea behind this type of investment strategy is understanding that the money you’ve saved only exists for when you need it. It values a more conservative investment approach meant to preserve capital and prevent loss in a portfolio.
In layman’s terms, it’s all about playing it safe. This is an especially helpful investment strategy when you know where that money you’ve saved is going in the short-term. For example, let’s say you’ve saved $15,000 for a kitchen remodel that you plan to do in six months. Since you know you’re going to be spending that money soon, there’s no real incentive to make a variety of risky investments.
Capital preservation is about holding on to as much money as possible for when you need it. Because of that, there are certain things you should consider when choosing this type of investment strategy. We’re going to take a look at a few different real-life scenarios to highlight when capital preservation is a good idea — and when it’s not.
Good Idea: You’re Retiring and Have Capital Saved
As we mentioned earlier, capital preservation is a great way to complement short-term financial goals. This can be the case for people who are getting close to retirement and want to use the money they’ve saved over the years.
People who are on their way out of the workforce with a comfortable amount of money don’t need to make risky investments. Instead, the goal should be to portion off a piece of their portfolio for safe investments that won’t be as affected by the uncertainty of short-term market volatility. By safe, we mean things such as chequing accounts, savings accounts, money market accounts, and certificates of deposit.
Bad Idea: You Want Investments with Big Returns
If you’re looking to earn big bucks with capital preservation, it won’t happen. This isn’t an investment strategy built on rapid wealth accumulation. If you think about investing like hockey, capital preservation is simply you playing goalie. You’re protecting what you already have. However, only those with a certain amount of capital and who want to put it in a safe place should use this type of strategy.
If your goal is to get more money through investing, start by speaking to a financial advisor and doing some financial planning. This will give you a better idea of the steps you should take to make investments that can get you significant financial returns on your portfolio.
Good Idea: You Want to Save for Important Life Events
Setting aside money for your son or daughter’s post-secondary education makes sense. What doesn’t make sense is taking that money you’ve saved, and putting it into high-risk stocks or bonds that can blow up in your face.
Just like saving for retirement, the capital you have needs to be as stable as possible. If you have plans for a wedding or home renovations, capital preservation is always a smart move. After ensuring you have the necessary funds, keep them in a chequing or savings account and let it sit until needed. Don’t waste time and effort investing in other assets for no reason.
If you’re looking to make investments beyond the goal of capital preservation, our trusted team of advisors can help you make informed financial planning decisions to put you on the right track. Contact us today!