Preservation Of Capital

What is 'Preservation Of Capital'

An investment strategy where the primary goal is to preserve capital and prevent loss in a portfolio. Preservation of capital is a priority for retirees and those approaching retirement, since they may be relying on their investments to generate income to cover their living expenses, and have limited time to recoup losses if markets experience a downdraft. This strategy would necessitate investment in the safest short-term instruments, such as Treasury bills and certificates of deposit.

Also referred to as capital preservation.

BREAKING DOWN 'Preservation Of Capital'

A major drawback of the capital preservation strategy is the insidious effect of inflation on the rate of return from "safe" investments over prolonged periods of time. While inflation may not have a significant impact on returns in the short term, over time, it can substantially erode the real value of an investment. For example, a modest 3% annual inflation rate can slash the real or inflation-adjusted value of an investment by 50% in 24 years.