Preservation of capital is an important investment strategy, particularly for those with limited funds. By investing in low-risk assets, the investor’s funds are protected from a potential sharp decline in the market.

A capital preservation strategy typically involves investing in assets that offer not only a low risk of loss but also relatively low returns. These assets may include Treasury bills, certificates of deposit, money market funds, as well as certain government bonds. All of these assets are low-risk because their value is linked to the underlying currency in which they are issued, such as the US dollar.

While preservation of capital is important, it’s worth noting that the strategy has a major drawback in the form of inflation. Over a long period, inflation erodes the value of a portfolio’s capital preserved in “safe” investments, leading to a negative return. This is why the capital preservation strategy is most effective for short-term investments.

In addition to choosing safe investments, investors can also hedge against inflation by investing in assets that protect against inflationary pressures, such as gold and real estate. Investors can also diversify their portfolios to mitigate risk, usually through a combination of stocks and bonds with varying risk profiles.

Preservation of capital has been used effectively by investors across the world for generations. Investors who use this strategy exercise caution and invest in assets that offer low risk and maintain their purchasing power in the long run. Thus, preservation of capital is an essential part of any investment portfolio and helps to minimize risk and maximize return.