Strategies to preserve your super capital in times of negative returns

To some, it’s no surprise that investment markets are volatile at the moment — and there’s no relief in sight. As a result, it’s time to shift your mindset from expecting the highest returns to simply preserving capital. Preserving capital in unpredictable times gives investors the best possible platform from which to enjoy the eventual market bounce-backs.

So, what are strategies you can turn to do this?

Choose quality over hype. 

In the past five to 10 years of sustained high returns, an emphasis on quality hasn’t been pushed. This was because confidence drove demand and speculation, even in asset classes of questionable value. 

However, when markets dropped in 2020 thanks to COVID-19, assets with valuations that were driven by hype, were dumped in a rush to quality. For the first time in a long time, we saw what happens when confidence is shaken and investors commit to quality like never before. Now, we’re seeing this pattern again. In fact, we’ll continue to see it in the coming year. Where hyped served investors well in the past, it’s time to rely on understandable, transparent, value-adding assets. 

Don’t set and forget. 

Say goodbye to passive investing — now’s the time to get involved with some hands-on investing. We’re not saying passive investing doesn’t have a place in the right portfolios because it certainly does, but setting and forgetting is less reliable in the current market. Now is the time to be more selective, and take an active approach to identifying assets likely to provide some relief. Ongoing analysis and response to fast-changing market conditions will give you the best chance of capital preservation.

Diversify!

Concentrated risk is a big no-no. This gives you the worst chance of capital preservation — even in good market conditions! Portfolios focused on only a few companies, single asset classes or geographic areas, leave you exposed to all types of risk. Diversifying across investment classes and styles and geographic zones will allow you to put all your eggs in different baskets. This strategic spread gives you the best chance at relief in some areas by offsetting pain in others. All-in-all, it’s a more comfortable ride with a better prospect of capital preservation.

Remember, cash is king.

Are you drawing an income from your portfolio? The worst time to be selling down assets is when the market is depressed… This locks in losses and gives you no chance of benefitting from the eventual up-swing. 

We suggest keeping enough cash on hand to fund regular income drawdowns, replenished either from dividends, rent or interest payments. Ideally, you’re looking at one year's income requirement (at least), but depending on your risk profile, it could be more. Keeping enough cash to fund short-term needs will give your portfolio a better chance of managing through the highs and lows of market behaviour.

More advice on preserving your capital.

Sometimes, a set-and-forget approach is all you need. Now is not that time. If you would like more information on preserving and protecting your income capital, we’re happy to provide you with some advice and connect you with investment professionals and advisors. So, start the conversation here.