Capital preservation is the strategy of protecting and preserving an individual’s or an organisation’s original investment capital. It is the opposite of capital growth, which aims to increase the value of an investment over time. Capital preservation is often the primary goal of investors who have a low risk tolerance or who are nearing retirement.
There are several ways to preserve capital, such as investing in low-risk assets such as bonds, cash, or certificates of deposit. These types of investments are generally considered to be less risky than stocks or other types of investments because they offer a fixed rate of return, and the principal investment is usually guaranteed.
Another way to preserve capital is by diversifying one’s portfolio. Diversification means spreading investments across different asset classes and industries, which can reduce the risk of a total portfolio loss. This can be achieved by investing in a mix of stocks, bonds, real estate, or other types of assets.
Another approach is to invest in assets with a low correlation, meaning their prices don’t move in the same direction. For example, if you invest in both stocks and bonds, when stocks go down, bonds usually go up and vice versa.
Another way to preserve capital is by using hedging strategies. Hedging involves taking a position in an asset that is designed to offset the risk of a loss in another position. For example, an investor who owns a stock may purchase a put option on the stock, which gives the investor the right to sell the stock at a certain price. If the stock price falls, the investor can exercise the put option and sell the stock at the higher price, thus preserving capital.
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