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How Investing for Capital Preservation works

Capital preservation is a major part of investing, where the primary goal is protecting the original amount invested rather than maximizing returns. But how exactly does investing for capital preservation work, and what’s the difference between capital preservation and growth? Here’s what you need to know about capital preservation and more.

Amur Capital offers a simple way to grow your money and receive a stable and consistent return. Contact us now, and we’ll help you start in a few minutes.

Key Takeaways:

  1. Capital preservation is an investing strategy that aims to protect the invested capital from losses and maintain its value over time.
  2. High-interest savings accounts, government and corporate bonds, and money market accounts are some of the most common assets used in investing for capital preservation.

What is capital preservation?

Capital preservation is an investment strategy aimed at protecting an investor’s original capital investment from losses and protecting its value over time. This approach is particularly employed by investors with a low-risk tolerance or those nearing retirement, as it aims to safeguard their funds against significant losses during market downturns.

By prioritizing the preservation of capital, investors seek to ensure the security and stability of their financial resources over time.

How does investing for capital preservation work?

Investing for capital preservation works by prioritizing stability over high returns. Specifically, the primary capital preservation strategy involves investing in safe, low-risk investments, such as savings accounts, treasury bills and certificates of deposit.

In addition, diversifying portfolios across different asset classes and investment vehicles that are less susceptible to market volatility may ensure that the overall portfolio is not overly exposed to the risks of any single asset class. Other safe investments with minimal risk include:

    • High-interest savings accounts: Most Canadian banks offer high-interest savings accounts, with deposited funds insured by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000 per account. While a high-interest savings account is considered one of the safest investments around, you can quickly lose the purchasing power of your money due to inflation if the interest rates earned are lower than the rate of inflation.
    • Government and Corporate Bonds: Bonds are loans with interest issued by companies or governments for a period. Hence, bonds repay the principal amount invested at a specified date or maturity. Government bonds have significantly lower risk than corporate bonds since the government backs them.
    • Government of Canada treasury bills: Government of Canada treasury bills (or T-Bills) are guaranteed by the federal government. Investors buy T-bills at a discounted rate and redeem them at face value upon maturity. While T-bills are sensitive to policy changes due to being dependent on the Bank of Canada’s overnight interest rate, they offer a guaranteed return on the initial investment.
    • Money market accounts: Similar to a mutual fund, money market accounts aim to preserve capital and provide income by investing in high-quality and short-term government and corporate debt securities. While these funds try to maintain a steady unit price, they are not CDIC-insured, which means there is a risk of capital loss.

Investors also achieve capital preservation by employing risk management techniques, such as taking an offsetting position in another asset that has a negative correlation with the original position (hedging) and limiting the size of individual investments to limit the potential impact of any single investment on the overall portfolio.

Capital preservation vs capital appreciation

Advantages of capital preservation

  1. Low risk: Investors who value capital preservation often have a lower risk tolerance than investors who want to maximize their returns. This means a conservative investment strategy allows them to invest in “safe” securities with minimal risk, aiming to preserve capital and prevent loss of value in their portfolio.
  2. Income and stability: Capital preservation investments, such as high-interest savings accounts and corporate bonds, often provide a steady stream of income (interest payments or dividends), which can benefit investors seeking a reliable source of cash flow.

Disadvantages of a capital preservation strategy

  1. Inflation: Lower returns are the primary drawback of capital preservation strategies against growth strategies. Although some of these safe, low-risk investments are insured, they may not provide inflation-adjusted returns, which means your money can lose its purchasing power over time.
  2. Interest rate: Fixed-income investments such as bonds and treasury bills that aim to preserve capital have an inverse relationship with interest rates. This means that when interest rates rise, bond prices fall, making newly issued bonds more desirable than old, lower-yielding bonds.

How Amur Capital MICs can help

Mortgage Investment Corporations (MICs) are unique, pooled investments in mortgages secured by Canadian real estate. The MIC earns money through interest payments and then shares those profits with its shareholders as dividends. 

With Amur Capital, investing in MICs means investing in professionally managed and highly diversified mortgages with a focus on capital preservation and consistent returns while providing much higher rates of return than some investments. 

For the conservative, the Amur Capital Conservative Income Fund (ACCIF) invests in residential first mortgages with an average loan-to-value (LTV) of 47%. ACCIF has $203 million in mortgages, and an annualized return based on Q1 2024 performance of 10.86%*.  

Other investors looking to earn a stable income may be better suited to the Amur Capital Income Fund (ACIF), which invests in first and second mortgages with an average LTV of 53% and targets an annual return of 11%. ACIF grew to $819 million, with the annualized return based on Q1 2024 performance of 12.23%*. 

Lastly, the Amur Capital High Yield Fund (ACHYF) targets a return of 13% by investing primarily in second mortgages with an average LTV of 66%. 

To learn more about how Amur Capital MICs can help you get consistent annual returns with a focus on capital preservation, contact our investor relations today.

* Based on unaudited annualized quarterly return as of 31st March 2024

FAQs

The answer will depend on your personal goals, investment horizon, and risk tolerance. If you are risk-averse with a primary goal of maintaining your capital, then investing for capital preservation may be suited for you. 

Capital preservation strategies include setting up a stop-loss order, hedging, and position sizing. Examples of assets used for capital preservation include treasury bonds, certificates of deposits, and other fixed-income securities. 

Depending on your investment strategy and goal, some of the safest investments to preserve capital include treasuries, certificates of deposits, money market funds, and other fixed-income securities. 

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