What is Capital Preservation & Why is Growth so Important?

Capital preservation is typically a conservative investment strategy where the aim is to preserve capital and prevent loss in an investment portfolio, but investing for lower returns can also be risky.

Preservation of capital typically involves investing into “safe”, short-term financial instruments, which yield lower returns. The risk with investing for low returns is the impact on its value by inflation.

Inflation may not have a significant impact on returns in the short-term, however, over time it can substantially erode the real value of an investment.

The Consumer Prices Index including owner occupiers' housing costs (CPIH) increased by 3% in the 12-months to August 2021, up from 2.1% in the 12-months to July.

At the time of writing, the typical annual interest rate of a trust account was sub 0.5% per annum and the Bank of England Base Rate stood at 0.1%, meaning that the value of the capital invested would decrease in real terms.

In the UK, the Financial Services Compensation Scheme (FSCS) provides protection of just £85,000 in the event of a bank collapsing, which we saw in the 2008 crash with the likes of Northern Rock, Bradford and Bingley and the Icelandic banks, so any cash above this level is at risk.

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Why is Growth So Important?

Preservation of capital is particularly important for people approaching retirement age, who need to safeguard their funds to cover their living expenses during retirement.

But with inflation, the need for the growth of investment is also important to ensure that the income from investments can meet the increasing cost of living expenses. If the growth of an investment does not keep up with inflation, in real terms, there would be a loss in value, even though the investment is at the same amount of cash as when first invested.

For example, a 3% annual inflation rate can erode the real, or, inflation-adjusted value of an investment by 50% in 24-years.

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Why Invest in Property?

Investing into property is viewed by many investors as an excellent method of capital preservation, which also provides the growth that they need for their investment pot to keep up with the rate of inflation.

The number of new homes needed in England is estimated to be up to 345,000 per year, accounting for new household formation and a backlog of existing need for suitable housing. In the financial year 2019/20, the total housing stock in England increased by circa 244,000 homes. This is an increase of 1% year-on-year, but the level of supply is still well below the level of housing needed to meet demand, which causes upward pressure on house prices.

Industry experts have also forecast price growth of 21.5% in the 5-years to 2025 as supply failing to keep up with demand. Areas of high growth include the North West of England, where prices are forecast to increase by 28% in the same period 2025 and 16.5% rental growth is also forecast in the North West city of Manchester.

Many international investors see the UK as a safe haven for preserving their capital whilst providing them with the growth they need to avoid loss of its value.

Explore our Manchester property investments, with prices from £129,995 and returns of up to 7% est.

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