Greater Capital Preservation

Capital in the context of an individual investor is the value of the investor’s portfolio, i.e., the value of the assets that an investor holds.

Shifts in the markets impact the value of such portfolios. For example, if an investor is 100% invested in US equities, a 10% drop in the US equities market would cause a 10% drop in that person’s investment portfolio. When that portfolio falls in value, the capital of that portfolio also declines.

Capital preservation means minimizing declines in the capital holdings of a given investor.

Ideally, a decline in one particular asset class, such as stocks or bonds, does not lead to a one-for-one decline in an investor’s portfolio. Capital preservation would imply that the value of a portfolio is better protected from dramatic swings in any one market.

The Role of Greater Capital Preservation in Investment

An investment strategy that includes a variety of asset types, spread across different markets, will lead to a portfolio that is less subject to the fluctuations in any individual market, ideal for an investor who would prefer to avoid exposure to all of the effect of a large drawdown in one market.

At Convexity Wealth Management LLC, we aim to spread investments across different markets so that we can minimize the extent to which portfolios are impacted by extreme changes in any individual market, i.e., we have a goal of “Greater Capital Preservation.” An added benefit to “Greater Capital Preservation” is the effect it has on regaining losses. If an investment loses 10% of its value, the positive return required to break even is 11.1% (the return must be larger than the loss). So, the more loses that can be prevented in a downturn of any individual market, the less positive returns are needed to earn back the value of the initial investment.