Insights for Investors: Don’t Forget about Capital Preservation


By Maurice Stouse, Financial Advisor and Branch Manager

Investors and their advisors often talk about sleeping well at night. We were recently reminded of the acronym of SWAN – Sleep Well at Night. We have seen consistently over time that nothing is more important to savers and investors – when considering their wealth – nothing trumps the ability or opportunity to sleep well at night.

We also think it important to point out to investors, when making an investment decision, to not lose sight of preserving capital, for at least a portion of their assets. That might be SWAN money.

What about Black Swans? Have you ever heard of that term before? Most swans are ivory colored and when gazing upon them, nothing stands out, unless you spot a black swan. In the world of investing and the economy, a black swan is an event that no one sees coming, however is always on the horizon. It may not always be visible, particularly when things are going well. Ned Johnson, for many years was the Chairman and CEO of Fidelity Investments. He was heard many times saying just that: “We are most vulnerable when things are going well.”

What do we, along with a lot of other people, see as black swans on the horizon? We will start with China. For many years the growth and ascent of China was seen as remarkable; plus, it attracted a lot of investor interest. China now, however, is experiencing a significant economic downturn. Some expect this to last and that government measures may not be enough to stop the decline. The term “Japanification” is being heard and seen lately. Japan, in the 90s on onward continued decline in demand and has yet to recover. We think that China’s impact on the world is significant enough that it is now a black swan.

Commercial Real Estate. Many U.S. banks have made substantial loans for the construction and purchase of real estate throughout the country. This expansion of lending was substantial over the past decade and accelerated with the accommodating Federal Reserve action on rates and the money supply. Many of those loans are coming due in the next few years and perhaps will renew at much higher rates. And the underlying properties might not carry the same value. Office buildings have somewhat lower occupancy now and that could add for lower values. It is not possible to know for sure if this will have an impact (from defaults, for example) on the banking sector as well as the economy. Nonetheless, we see it as a black swan on the horizon.

Third, is the so-called shadow banking system. There are a lot of examples in the system: Hedge Funds, Private Equity funds but also money market funds, exchange traded funds as well as securities broker dealers. The existence of this system is critical to the ongoing function of the economy. However, it did play a role, as did the banking system in the financial crisis in 2008. According to Business Insider, “U.S. banks have given out $1 trillion of loans to non-regulated “shadow banks.” We understand that a substantial amount of that was to hedge funds and private equity funds. Market volatility can have an impact on many of the borrowers in this system. So, we see that as risk on the horizon.

The mere existence of black swans is nothing new. It is part of the reality and experience in investing. That is why we also encourage our readers and investors to always have a plan to preserve capital. In other words, have a plan and strategy for asset allocation base upon goals, time frame and, ultimately, risk tolerance.

How do you go about preserving capital? One way to is to have your emergency and opportunity money in a bank account, a CD or perhaps a money market account or fund. When it comes to your overall investments and time horizon, bonds might play a role in future capital preservation. While bonds can and do fluctuate on the open market every day (and are reflected in your statement value) they have a maturity and ultimate value. It is a way of knowing what you have and when you will have it. The return of capital, of course, is based upon the issuer. U.S. Treasuries and U.S. government agency bonds would be considered the most conservative. However, investors should also consider municipal bonds. Corporate bonds would follow next.

Some might wonder if it is the right time to invest in bonds or if they make sense if you are trying to grow your assets. Warren Buffet has always suggested that investors not be in a hurry. He was talking about stocks probably, but the lesson can be the same for a long-term plan for your investments. Many investors build their portfolio not only to be time, risk and goal appropriate, but age appropriate as well.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James. Main office located at The First Bank, 2000 98 Palms Blvd., Destin, FL 32451. Phone 850.654.8124. Raymond James advisors do not offer -tax advice. Please see your tax professionals. Email:

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Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.