Definition
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.
Explanation
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.
Related Terms
risk of ruin, conservative investing strategy, 90 - 10 investment strategy, all equities strategy, capital growth strategy