Preservation of capital is one of the most important rules of investing. Just like the physician’s oath is to do no harm, the investor’s oath is preservation of capital. Don’t get negative returns and don’t loose all of your money on a bad investment. This is probably the top reason why so many individuals fear getting into the market and end up sittting on the sidelines. I’m sure we have all heard the horror stories of people losing their shirts in realestate investing and the like.
Offensive stock market investors who are trying to beat the market by investing in individual stocks will have limit sell orders to protect their capital and even have percentage capital lost for each security that they are comfortable with before they sell and take a loss. However for the defensive investor that invests in index funds and takes the average return of the market, asset allocation is one of the major variable they have control of, with the exception of which index fund they choose. For these investors preservation of capital can look a little different. The defensive investor is a long term investor and short term capital lost is only transient in the grand scheme of investing. For the defensive investor having a reasonable investment plan and sticking to it no matter what and continuing to dollar average is the way to preserve capital and build wealth overtime.
All investors no mater what the investment strategy is would benefit from one of the most overlooked tools to help and preserve capital. That is the emergency fund. One of the worst ways to loose investment capital is to have an emergency occur that forces you to sell down your portfolio in order to get the emergent funds needed. If you are an offensive or defensive investor and have to sell during a market crash or bear market this can be devastating. Having a 3-6 months emergency fund is necessary for all investors, because all investments have risk and preservation of capital in the long run is still #1.