Capital preservation is a priority for many Canadian investors, particularly those who are likely to need access to some of their investments in the near future or who need to draw a reliable income from them. While the goal of capital preservation is to protect the principal value of investments, it’s equally important to achieve modest growth so your money keeps pace with inflation.
Let’s explore how capital preservation works, the different strategies for making it happen and how professional money managers are able to reduce the risk of losing capital.
What is capital preservation?
Capital preservation is the focus on minimizing the risk of losing your initial investment while maintaining its value over time. It’s particularly relevant for risk-averse investors and those with shorter time horizons, such as retirees or people saving for specific financial goals.
The reason why capital preservation is so important is that recovering from losses can be significantly more difficult than avoiding them in the first place.
Let’s look at an example: Sara’s portfolio drops in value from $100,000 to $50,000, bringing a 50% loss. She would then need a 100% gain to return to the original value of $100,000. Compare this to a smaller loss: if her portfolio dropped from $100,000 to $80,000 (a 20% loss), she would only need a 25% gain to recover.
Losses can have a disproportionate impact on your portfolio’s value, so a focus on capital preservation strategies can protect your wealth and reduce the pressure to achieve high returns just to break even. By minimizing losses, you can set yourself up for steady growth and long-term financial stability.
The key to successful capital preservation lies in balancing safety with the potential for modest returns. This involves using a mix of investment strategies designed to reduce risk, maintain liquidity and help ensure stability.
Capital preservation strategies
Below are some of the most tried-and-tested capital preservation strategies, which are used consistently by financial advisors.
Diversification
This is one of the most effective ways to minimize risk and preserve capital. By spreading your investments across different types of investments, industries and regions, you can reduce the impact if any single area were to perform badly.
A diversified portfolio might include:
- Fixed income securities, such as government bonds, corporate bonds and guaranteed investment certificates (GICs).
- Equities (shares), so your money keeps up with inflation.
- International investments to reduce exposure to domestic economic risks.
- Alternative investments, such as private assets and infrastructure: these have a low correlation with the markets, meaning their values tend not to move in relation to each other.
Invest in fixed income investments
Fixed income investments are a cornerstone of capital preservation strategies. These assets provide predictable returns and lower risk compared to equities. Options include:
- Government bonds: federal and provincial bonds are among the safest investments in Canada.
- Corporate bonds: investment-grade corporate bonds provide higher yields than government bonds, while maintaining relatively low risk.
- Guaranteed investment certificates (GICs) offer fixed returns over a specified period and are insured by the Canada Deposit Insurance Corporation for amounts up to $100,000.
Keep some of your portfolio in cash
A really simple but effective capital preservation strategy is keeping a certain percentage of your portfolio in cash or cash equivalents. During times of market downturns, you can draw from these funds rather than having to cash in investments that have lost value. This will give those investments time to regain their value before you sell them, thus preserving your capital.
Dollar-cost averaging
This capital preservation strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. This reduces the risk of investing heavily when assets are at their peak or selling a large number of investments that have lost value. This way, you can smooth out volatility over time.
For example, an investor could commit to allocating funds monthly into a mix of equities and fixed income securities, regardless of market activity, thereby reducing the emotional impact of market fluctuations.
The role of professional money management
While individual investors can implement many of these strategies on their own, professional money managers can enhance capital preservation efforts by offering:
- Expertise and oversight: professional portfolio managers actively monitor markets, make informed adjustments and ensure that portfolios remain in sync with your financial goals. For instance, they may shift allocations toward more defensive investments (such as fixed income securities) during periods of economic uncertainty.
- Diversification: managed investments provide access to a broader range of asset classes and markets than most individual investors could achieve on their own. These include international equities, emerging markets and private assets.
- Rebalancing and risk management: market activity can cause the ratios of your portfolio to drift from its original target (for example, 60% equities and 40% fixed income). Professional managers regularly rebalance portfolios to maintain diversification and risk levels, helping to preserve your capital.
Working with a financial advisor
Navigating the complexities of capital preservation and investment strategies can be challenging, especially when markets are volatile. Financial advisors use their expertise to tailor investment strategies to your unique financial goals, risk tolerance and investment time horizon.
Moreover, advisors provide an objective perspective, helping you to avoid making emotional decisions that could have costly repercussions. Whether you’re planning for retirement, preserving wealth for future generations or safeguarding your savings during uncertain times, talk to your IG Advisor about capital preservation strategies. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.
Mutual funds and investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm). Additional investment products and brokerage services are offered through Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund. GICs issued by Investors Group Trust Co Ltd., and/or other non-affiliated GIC issuers. Minimum deposit, rates and conditions are subject to change without notice.
