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Millionaire Money Habits

July 21st, 2008 at 11:15 am

What’s Your Investment Strategy: Capital Preservation vs. Capital Growth

Investing without a strategy is like a Sunday driver without a map. You know have a vehicle that can take you places, so you get in and drive around with no destination, no direction and no concept of how long you will be driving before you run out of gas.

It’s important to look at your current situation and examine your goals, timeline and risk tolerance, and outline a plan to reach those goals. Then you can evaluate your necessary investment strategy and game plan. One strategy is to distinguish between a period of capital growth or capital preservation.

According to, capital preservation is, “An investment strategy whose primary goal is to prevent the loss of an investment’s total value.” It is a highly conservative investment strategy, characterized to avoid risk but still acquire moderate appreciation on your money. Capital preservation usually means investing the bulk of a portfolio in fixed-income investments that guarantee returns, but offer lower annual returns in exchange for their low-risk association. High quality bonds, money markets and certificates of deposit (CDs) are some examples.

Capital growth, according to is, “An asset allocation strategy that seeks to maximize capital appreciation, or the increase in value of a portfolio or asset over the long term.” This would include a portfolio that mostly contains equities, or stocks, in the hopes that the value of the stock will increase over time. Investing for capital appreciation brings on more risk, but the potential for returns can be much greater.

How to determine your investment strategy will depend on your goals, your timeline and your risk tolerance - or how much you can comfortably afford to loose in a worst case scenario. Typically, a person nearing retirement will shift their investment strategy over time towards a capital preservation approach since they do not have the benefit of taking risks and holding through market corrections. Younger investors generally focus more on capital growth, as they have an entire life to rebound from downturns and learn from mistakes.

Current market conditions can also determine an investor’s strategy in the short-term. As discussed in The Best Time Ever to Buy Stocks, the market regularly goes through cycles. There are periods that stocks tend to trend up and times that it trends down. During down cycles it may be best to focus more on capital preservation and prepare to distribute your capital into the stock market as opportunities arise and the market turns around. This, of course, assumes you know how to time the market efficiently, which is a complicated thing to do.

Millionaire Money Habit: Analyze your current situation, investment goals, risk tolerance (link to measuring risk tolerance article), and your timeline to help develop your investment strategy. If you are nearing retirement, put more weight on low-risk, fixed-income investments. If you have a 10 year or longer investment horizon, concentrate more on a diversified stock portfolio for greater returns over time.

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