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Wednesday, December 3, 2008

Capital Preservation Strategy

Capital preservation strategy is a portfolio management and investing strategy which aims at preservation of capital over maximization of return. The strategy is widely followed by many investors especially by persons nearing retirement.

Capital preservation strategy is a long-term strategy which includes investing in low-risk low-profit instruments like bonds, certificate of deposits, money market funds and other fixed-income instruments. Although extreme capital preservation strategies do not include investing in stocks or similar risky investments, most allocate a fixed portion of their portfolio (usually no more than 40%) to invest in stocks, preferably blue-chips, similar large-cap stocks and ETFs.

The advantages of capital preservation strategy include
  1. Lower risk of capital loss.
  2. Steady increase in portfolio value.
  3. More capital to re-invest.
  4. Suitable for long-term capital growth.
  5. Less-active monitoring of portfolio demanding lesser time for investment management.
The disadvantages of capital preservation strategy include
  1. Less return compared to capital growth strategies.
  2. Not so suitable for traders/investors having good investment knowledge.
  3. Demand strict use of stop-losses and similar risk-minimizing tools.
  4. Not suitable for achieving short-term profit goals.

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posted by Daniel Pipitone at 4:47 AM

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