The term preservation of capital refers to a strategy that attempts to prevent a loss of funds in a portfolio. Preservation of capital is important to investors that are not willing to risk a loss, even in the near term.
The primary objective of a preservation of capital strategy is to prevent the loss of a portfolio's value. It's oftentimes employed by retirees that use the portfolio to pay for their monthly living expenses. Even if higher returns are possible, these investors are unwilling to risk the possibility of a near term loss in capital. While this strategy can work over a relatively short period of time, inflation can erode the real buying power of the portfolio in the long-term.
A preservation of capital strategy would be comprised of very low risk, fixed-income investments such as Treasury Bills, money market accounts, and certificates of deposit. This type of portfolio is well suited to individuals with extremely low risk tolerance scores.
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