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Capital Preservation vs. Growth

When times are economically uncertain, many decide that capital preservation is more important than growth. When the economy is in trouble, and when there are concerns that things could get worse, many switch their portfolios into assets that are considered less risky. The idea is to preserve their capital, rather than focus on growing their assets. This is because growth comes with greater risk.

Greater Growth Potential = Greater Loss Potential

Growth can be a great thing. It allows to enjoy larger returns, and it builds a nest egg. Growth investments like stocks, as well as even riskier opportunities like currencies and commodities, have the potential to turn your invested capital into big gains.

Unfortunately, when things are going badly in the economy, this same potential for growth can also turn into potential for loss. This means that instead of seeing big gains, you could see big losses. These losses can come at a difficult financial time when you can ill afford such losses. As a result, many shift into capital preservation mode, so that principal is at least safe.

Protecting Principal

Because growth investments and products can result in loss of principal, capital preservation can be attractive. Investors move their money into products that are considered relatively safe, including cash and some bonds. These products are low yielding, but the point is safety. Money is kept safer, and there is a lower risk of loss of original capital (especially if cash products from FDIC insured institutions are used).

Moving Back Into Growth

While capital preservation can feel safer to many, it is important to realize that if you rely only on the safest products, you will not be able meet many of your financial or retirement goals. It is important to know when to begin investing in growth products again. Indeed, it is often a good idea to keep a portion of your portfolio in certain index funds, ETFs, and other less risky growth and/or value products in order to take advantage of the low prices during a tough economic time.

Consider the time frame of your financial goals, and consider shifting assets into growth while prices are low, so that you can take advantage of coming growth. If you are close to retirement, though, it might be worth it to shift some of your portfolio into capital preservation products as a safety net. In the end, what you choose to do depends on your situation and your financial goals. A financial professional can help you work out whether capital preservation or growth (or what combination of the two) is best for you.

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