Strange as it may seem, your priorities change when you have enough capital to be financially independent, whether from selling a business, retiring, or getting a windfall from inheritance. It’s common for the focus to jump from aggressively growing assets to preserving their value - after allowing for the effect of inflation shrinking values and costs, including tax. Preserving capital isn’t about burying cash in a saving account, but recognising that the value of currency changes over time, so you need a way to guard the absolute monetary value of your savings.
Putting your money in carefully selected stocks is great if you are hoping to see a return, but preserving capital requires a different approach. The trick is to put your capital across a range of largely defensive assets that, together, reduce the overall level of risk but give it a chance to outrun inflation and costs. This is the ideal, sleep-easy position to be in provided that your lifestyle costs are not cannibalising the capital.
That is why, when working for clients in this space, we separate assets into two pots, one to support lifestyle, the other to outrun inflation at the lowest rate of risk.
So how do we determine where you should choose to preserve your capital?
First, we establish the medium to long-term cost of lifestyle and establish a plan to deliver it with least risk, this becomes the Lifestyle Cash Reserve.
We use a combination of cash deposits, short duration Government bonds and AAA-rated Euro Liquidity funds that spread cash across 50 or so of the world's safest banks for the Lifestyle Cash Reserve.
We position the rest of the capital into reliable income-producing assets including inflation-linked Government bonds, property, global real estate and infrastructure, high yield credit, sovereign and corporate, equities, and some gold.
We use custodians to hold assets that are determined to be the safest in the world to separate your capital from the balance sheet risk of financial institutions.
We ensure that you have full knowledge of all costs and instant access to information, values and to cashing out if you need to get access to funds in a hurry.
There’s no point driving the investment equivalent of a Ferrari with all the thrills and spills if it means you cannot live or sleep with the white-knuckle ride that comes when the road gets occasionally dangerous. High returns mean high risk. There is a time for it and a time when what you need is the reliable resilience and dependability of a tractor, not a sports car. That’s why capital preservation is the stuff of a careful, conservative blend of assets that make sense when added together, followed by regular ongoing reviews to ensure that it's doing what it says on the tin and helping you sleep soundly no matter what the media headlines bring.
Despite what may be claimed by investment sellers, you cannot have your cake and eat it. Strong growth and capital preservation are mutually exclusive and trying to do both is a recipe for frustration and for unexpected capital losses. More than any other sector of advice, this is the one that requires the most skill and experience to get the balance right.