Let’s picture Hope as an investor who is doing relatively well with his business. He gets a chance to try to step up and better his company, but he is posed with the dilemma of losing a reasonable amount of capital or gaining a lot more.
The thought of settling for his moderate business scale in the name of playing it safe appears to be a more ideal reason to opt for than that of going big and losing big. So, Hope does not stake or put anything on the line.
Unfortunately, he later realizes some months later, that the business he was scared to invest in turned out to be a huge success.
There are a lot of Hopes out there in the business world who are still afraid to take huge risks. The moral in the analogy above is not to state that taking risks always yield positive outcome; rather, it shows that it takes courage to survive as an investor.
More so, it shows that there will always be a tradeoff between wanting to make more money through investment growth and capital preservation.
This tradeoff is also known as the tradeoff between risk and return as capital preservation investments have little or no risk and as such yield little or no returns and growth assets could potentially yield more but do not guarantee your principal.
Capital Preservation versus Investment Growth
Capital preservation, as the name implies, is being able to preserve your capital or initial investment. The idea is that you choose fixed-income investments that guarantee the return of your principal. As you would expect, as a result of the low risk, the return is low.
Capital preservation is a conservative investment strategy with the primary goal to safeguard capital and prevent loss in a portfolio. It is a something of a ‘not-biting-more-than-you-can-chew’ policy that sets a restraint that guides the capital preservation conscious investor on how to hold his or her funds in various kinds of investments according to their investment objectives.
Investment growth, on the other hand, requires achieving the goal of generating income or appreciation in your business.
It is one thing to put money into work to start a project, it is another thing to achieve the goal of generating income to develop your project. The primary goal of every investor is to achieve economic growth. Economic growth can be reached through the application of sound investments. Investment is oriented toward future returns and therefore entails some amount of risk-taking.
Risk In Business And Risk Management
Every business faces risks that could bring about threats to its progress. Risk is described as the probability of an event and its consequences. Risk management is the practice of adopting processes, systems, methods, and tools for managing these risks.
It involves identification of what could possibly go wrong, considering and evaluating the risks to be tackled and implementing strategies to overcome them.
Creating a Balance
The tradeoff between capital preservation and investment growth predominantly depends on how to manage risk, as this puts a balance to your preservation of capital and aims to invest.
It, therefore, comes down to how courageous and diplomatic you are. Having gotten courage in check, diplomacy involves tactful guidelines on identifying risks and how to deal with them.
Thus, in adhering to guidelines, you are partaking in a risk management process. This process includes:
- Identifying the risks surrounding your business activities
- Assessing the possibilities and likelihoods of an event
- Understanding how to respond to these events
- Putting systems in place to deal with the consequences
As a result, the process of risk management improves decision-making and planning, seeking the professional guidance of an advisory service will help you anticipate what may go wrong and put systems in place to minimize losses and maximize returns.
This is the best way to make the tradeoff between capital preservation and growing your investments for gains.