Many financial advisors recommend saving 10 times your salary if you plan to retire at 67.
If you’ve been diligently trading stocks or buying bonds, you might even be close to hitting that goal.
But, what if one drop in the stock market made you lose all the money you’d spent years growing? And what if you were only a few years away from retirement and didn’t have the time to regain those losses?
The good news is, you can protect yourself from these major fluctuations with a strategy called capital preservation. Keep reading to learn what it is and how to make this investment strategy work for your portfolio.
What is Capital Preservation?
Capital preservation is a conservative investment strategy with a goal of preventing loss. This strategy is also called preservation of capital.
In other words, it is a safe strategy that preserves the face value of your money (or financial assets).
This type of investment is meant to be a short-term strategy for people getting close to retirement age. This money is meant to be there when you need it. You may need this money to pay for your living expenses or healthcare when you’re retired.
Basically, it’s the practice of setting aside money for safekeeping. You’ll be protected from market volatility because the money is kept as cash instead of being invested.
This capital is usually kept in bank accounts, CDs, or U.S. savings bonds.
Pros
- There is little to no risk in this strategy.
- You’ll be protected from market volatility.
Cons
- You won’t make much of a profit.
- Your capital will be at the mercy of inflation.
The Problem of Inflation
Inflation is what makes goods more expensive and drives up the cost of living. It’s also the biggest drawback in the preservation of capital strategy.
For example, if you put $10,000 in the bank today, it will still be that same $10,000 in five years. Meanwhile, the price of everything has gone up in those five years. Even though the dollar amount is the same, that $10,000 is not worth as much as it was when you deposited it.
This is why this strategy is meant to be short term. The longer you use the preservation strategy the less money you’ll end up with because of inflation.
Types of Capital Preservation Funds
Bank accounts like checking or savings accounts are the simplest option. Just make sure that the accounts are FDIC insured. It will protect your money up to $250,000 dollars.
Money market accounts and certificates of deposit (CDs) are also popular choices. You need to make sure these are FDIC insured as well.
Why Your Investment Portfolio Needs It
As you approach retirement age, you need to include capital preservation funds in your portfolio. If you have all of your investments tied up in stocks, you’ll have nothing to fall back on if the market fluctuates.
Because these funds are virtually risk-free, they’re a good balance to riskier investments like stocks and bonds.
Next Steps
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