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How to Invest for Capital Preservation

Barbara Friedberg

Capital preservation prioritizes preventing investment loss.

Retirees and those approaching their final working years typically rank safe investing over capital growth investments. Capital appreciation is the goal of growing assets.

An investor's comfort with risk drives the capital preservation portfolio.

Craig Kirsner, the author of "Retire Strong: Preserve and Protect Your Wealth and Leave a Legacy," says: "The most important thing a retiree can do is to make sure they have the right amount of risk for them in their retirement portfolio."

Kirsner reminds investors that stocks are growth investments. At times stocks also offer dividends, not principal preservation.

Risk is a multidimensional concept and includes risk tolerance, risk comfort, timing risk, inflation risk and more. A simple way to mitigate risk is to have low-risk investments for shorter-term needs.

[See: 8 Great Tips to Shield Your Portfolio From Volatility.]

Matt Boelter of Viridian Advisors in Bothell, Washington, describes a time-based metric for asset breakdown.

Assets needed within the next three to seven years should be invested conservatively, typically in short- and intermediate-term bonds and certificates of deposit. For assets needed within eight to 15 years, a mix of stock and bond investments is appropriate, Boelter says.

Investors who are more comfortable with risk will own greater amounts of stock assets and fewer bonds and vice versa. A good financial advisor or risk tolerance calculator can help uncover a reasonable mix of stock, bond, and other asset classes.

Here are a few ways to invest for capital preservation:

-- Target-date funds.

-- Capital preservation funds.

-- Real estate investments.

-- Annuities.

Target-Date Funds

Historically, during all 20-year periods, stock market returns were positive. So using this as a guide, investors can be confident in keeping money not needed for several decades in the stock market for greater growth.

For investors seeking a one-fund investment, a target-date fund is an easy way to achieve diversification, capital preservation and modest appreciation for a low fee. A target-date fund includes stock and bond investments and is designed to manage risk.

The secondary goal of a target-date fund is total return growth. These funds automatically rebalance and are professionally managed to become more conservative as the target retirement date approaches.

For example, the Vanguard Target Retirement 2025 Fund (ticker: VTTVX) is designed for someone expecting to retire in approximately three to seven years.

With a 60% stock and 40% bond allocation, the fund spans the U.S. and global stock and bond markets. Each year until 2025, the fund will reduce the stock allocation and increase fixed assets. After 2025 the fund reverts to a 50% stock, 50% bond portfolio.

The fund continues to reduce stock exposure and increase fixed assets until it reaches a 30% stock and 70% fixed allocation by roughly 2032.

The 30% stock/70% bond allocation is an ideal capital preservation portfolio. This conservative asset allocation is a straightforward way to invest for income and a modest total return.

Capital Preservation Funds

Other capital preservation funds, with completely different investment approaches than the target retirement product, are the First Trust Target outcome exchange-traded funds, says Scott Thompson, president of Thompson Wealth Advisors in North Carolina. These time- and option-based funds place a band around both potential investment gains and losses.

The FT Cboe Vest U.S Equity Buffer ETF Nov ( FNOV) attempts to provide returns up to 12.36% while capping losses at 10%. To achieve this goal, the fund invests in customized FLEX options. This specific fund is designed for capital protection through Nov. 20.

[See: 10 Top Investing Themes for the Next Decade.]

Thompson explains that if the S&P 500 index drops 10% during the target period, the fund return would be zero, protecting the invested capital from any loss. On the flip side, if the S&P 500 rises 15%, FNOV would return 12.36%, the upper cap of the fund.

For investors looking outside of typical Wall Street investing, real estate is an ideal diversifier and a path to capital preservation. Owning real property like rental real estate outright offers tax benefits, capital preservation and appreciation.

Alina Trigub, a managing partner at New York-based SAMO Financial offers several creative real estate investing outlets including real estate investing clubs, where investors get together to purchase real estate as a group.

Real Estate Investments

For those who prefer to leave the management to professionals, there are many avenues for real estate investing including, REITs, real estate crowdfunding and professionally managed direct real estate investments.

"By investing directly in real estate assets, there is an opportunity for a higher yield and often a more stable asset as it is not tied to changes in the traditional markets," says Adam Hopper, co-founder and CEO of RealCrowd, a real estate crowdfunding platform.

Popular new real estate investing platforms include EquityMultiple, RealtyMogul, Fundrise, RealCrowd and CrowdStreet. Some of these firms require that your money remain invested for several years. This type of real estate investing might require certain income and net-worth levels.


Annuities are a popular insurance product for guaranteed cash flow. After making a lump sum or series of payments, an annuity provides regular cash flow, beginning either immediately or at a time in the future.

With countless varieties and fees, buying an annuity can be confusing. High-fee annuities are less desirable than more transparent low-fee products. By purchasing an annuity from a discount financial company like Vanguard, you have the opportunity for lower fees.

While providing cash flow, an annuity can help preserve your net worth and additional investments.

Investing for capital preservation can also lead to growth. These investment principles will shore up your capital while allowing for modest growth.

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To avoid timing risk, maintain a liquid net worth in the amount of one to two years of living expenses to protect assets should the market tank during the first year or two of retirement.

Set up an asset allocation with a worst-case loss scenario that you can accept.

Either with a financial advisor or on your own, choose diversified conservative investments that span stock, bond, real estate and other asset classes. Check retirement and financial calculators to validate your financial assessments.

Lastly, it's important to understand how your investments work and the fees. Try to keep investment management fees as low as possible.

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