19 Oct Capital Returns vs. Capital Preservation
Gaining that solid return on invested capital is the motive of nearly every investor the world over, but macro trends can cause strategies to shift. For instance, in times of economic recession, investors often husband resources, baton down the hatches, circle the wagons and prepare to ride-out the plummet. In this case, investors are often focused on capital preservation over capital returns. The concept of capital appreciation is a subset type of capital returns which includes a return, typically baked-into equity in a security or asset, that is only realized upon the sale or liquification of that asset. Examples include appreciated real estate, private equity or stocks.
In times of economic expansion, investors often chase capital yield, even investing in overvalued assets and projects with paltry ROI, until corrections occur and the cycle repeats.
The very best investment strategies include a good mix of capital preservation and capital returns. How that mix looks for each investor is a byproduct of many factors that should be personalized for investors by their wealth advisor.
Here is something to consider:
Capital returns and appreciation without an eye of capital preservation is risky.
Capital preservation without sprinkling-in a capital returns strategy is prudish.
These concepts are qualitative, but always worth considering regardless of whether th intended target investment is a private business, public equity or real estate.