Capital Preservation

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 12, 2023

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What Is Capital Preservation?

Capital preservation is a strategy for managing investments with the goal of protecting the initial investment or capital from losses and preserving its value over time.

The primary objective of capital preservation is to minimize the risk of losing money, rather than seeking high returns or maximizing gains.

Investors who prioritize capital preservation may choose to invest in low-risk assets such as bonds, cash, and money market funds, which offer relatively stable returns and have a lower risk of losing value compared to riskier assets such as stocks or real estate.

They may also opt for investments with fixed income or guaranteed principal, such as certificates of deposit (CDs) or annuities.

Capital preservation is often favored by investors who are close to retirement or those who have a low risk tolerance. It can also be a viable strategy during times of economic uncertainty or market volatility, as it aims to minimize losses during market downturns.

Types of Capital Preservation Strategies


Diversification is a cornerstone of any capital preservation strategy. Spreading investments across various assets, sectors, and geographies can reduce risk and protect capital.

Asset Allocation

By allocating investments across different asset classes, such as stocks, bonds, and cash equivalents, investors can reduce the impact of a poor-performing asset on their overall portfolio.

Sector Diversification

Investing across multiple sectors can protect against sector-specific risks, as various industries often perform differently under different economic conditions.

Geographic Diversification

Investing in different countries or regions can help mitigate the risks associated with local economic or political events.

Conservative Investments

Conservative investments typically carry lower risks and are more likely to preserve capital than more aggressive investments.

Bonds and Fixed-Income Securities

Investing in bonds or other fixed-income securities can provide a steady income stream with a lower risk than equities.

Dividend-Paying Stocks

Dividend-paying stocks can provide a source of income while offering some potential for capital appreciation.

Money Market Accounts and Certificates of Deposit

These conservative investments offer relatively low returns but provide a high degree of capital preservation.

Risk Management

Proactive risk management is essential for preserving capital.

Stop-Loss Orders

Implementing stop-loss orders can help limit potential losses by automatically selling an investment if its price falls below a predetermined level.

Hedging Strategies

Hedging involves taking an offsetting position to protect against potential losses in another investment.

Position Sizing

Managing the size of individual investments can limit the potential impact of any single investment on overall portfolio performance.


Role of Capital Preservation in Different Life Stages

Young Investors

For young investors, balancing risk and reward is crucial, as they typically have a longer investment horizon and can potentially recover from short-term market fluctuations.

Pre-retirement Investors

As investors approach retirement, shifting the focus to capital preservation becomes increasingly important. Reducing risk exposure can help protect retirement savings from market downturns.


For retirees, ensuring a stable income stream while preserving capital is essential. Managing withdrawal rates can help prevent depleting their nest egg too quickly.

Evaluating Capital Preservation Performance

Benchmarks and Indices

Comparing performance to relevant benchmarks and indices can provide valuable insights into how well a capital preservation strategy is performing.

Comparing Performance to Relevant Benchmarks

Selecting an appropriate benchmark for comparison is crucial to accurately assess portfolio performance.

Understanding the Limitations of Benchmark Comparisons

It is essential to recognize that benchmarks have limitations and may not account for specific investor circumstances or goals.

Risk-Adjusted Returns

Risk-adjusted returns take both return and risk into consideration, providing a more comprehensive view of performance.

Sharpe Ratio

The Sharpe ratio measures risk-adjusted performance by comparing an investment's return to its volatility.

Sortino Ratio

The Sortino ratio is similar to the Sharpe ratio but only considers downside volatility.

Other Risk-Adjusted Performance Metrics

Various other metrics can help assess risk-adjusted performance, such as the Treynor ratio and the information ratio.

Challenges and Considerations in Capital Preservation


Inflation can erode purchasing power over time, making it essential for capital preservation strategies to account for this risk.

Impact of Inflation on Purchasing Power

Inflation can reduce the value of money over time, which means that the purchasing power of an investment may decline even if its nominal value remains unchanged.

Strategies for Preserving Purchasing Power

Investing in assets that have historically outpaced inflation, such as stocks or inflation-protected securities, can help preserve purchasing power.

Interest Rate Risk

Interest rate changes can impact bond prices and, subsequently, capital preservation strategies focused on fixed-income investments.

Effects of Interest Rate Changes on Bond Prices

When interest rates rise, bond prices typically fall, potentially eroding the value of a fixed-income portfolio.

Managing Interest Rate Risk

Investors can manage interest rate risk by diversifying their bond holdings, investing in short-term bonds, or using bond ladders.

Market and Economic Factors

Market volatility and economic events can pose challenges to capital preservation strategies.

Impact of Market Volatility on Capital Preservation

Market fluctuations can lead to short-term losses in investment portfolios, making it crucial for investors to remain focused on their long-term capital preservation goals.

Diversification and Risk Management Techniques

Diversification and proactive risk management can help protect capital against market and economic risks.


Final Thoughts

Capital preservation plays a vital role in achieving long-term financial success and protecting one's wealth.

It is essential for investors to strike a balance between risk and reward, consistently adapt their capital preservation strategies to align with their personal circumstances and financial goals, and remain focused on proactive risk management.

By embracing a capital preservation mindset and employing effective strategies, investors can navigate the complex world of investing with greater confidence and a stronger foundation for a secure financial future.

As investors move through different life stages, their approach to capital preservation should evolve to meet their changing needs and priorities.

Diversification, conservative investments, and risk management techniques are key components of any capital preservation strategy, helping to safeguard wealth in the face of market volatility, inflation, and interest rate risks.

By understanding and addressing these challenges, investors can build resilient portfolios that stand the test of time and maximize their chances of achieving financial success.

Capital Preservation FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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