A reader answered a survey question last month with something I get in some form most months. How much of a portfolio should go into debt funds?
Fair question, from somebody who has already done the reading. And I can't answer it.
The honest reason is a little uncomfortable. The question already contains a decision, made somewhere earlier and never examined, and until that decision gets looked at, a percentage is only a number attached to an assumption.
Here's the assumption. Asking how much to put into senior debt takes for granted that senior debt is where capital preservation lives. That part usually gets settled quietly, while reading something that says so. Once it's settled, the only thing left to argue about is size. So the conversation becomes a percentage, the percentage feels like the difficult part, and nobody in the room notices the decision that actually matters.
There's a piece of my own money doing this to me right now.
So instead of a number, I have 4 questions. Each one earns its place only if the fund's own paperwork can't answer it. If the marketing can answer it, the question is teaching you how the product works.
Preserve it from what, exactly
Capital preservation does 2 jobs that get filed under one phrase.
The first is protecting a number. You have money set aside to keep safe, you'd like it to still be roughly that amount a few years from now, and you'd rather not live through a year that takes a visible bite out of it.
The second is protecting your ability to act. The money sits there so that when something arrives, a business you'd want to buy into, a parent who needs care, a market that finally gets cheap, you can move without taking apart something else you've built.
Both get called preservation, and they ask different things of the same dollar. A dollar defending the number wants low volatility and a coupon. A dollar defending your ability to move wants to be reachable on a Tuesday. Those two jobs probably don't belong in the same place, and they almost certainly don't belong there in the same amount.
The size depends on the threat, and most people who ask how much have never said the threat out loud.
So, the first question. When you picture the thing you're preserving against, what is it, specifically? A market drawdown. Your income ending sooner than planned. Each one wants a different amount, and some want a different kind of money entirely.
Key points:
Capital preservation covers 2 different jobs: protecting a number, and protecting your ability to act.
The 2 jobs want different things from the same dollar, so they size differently.
This is the question to ask: what specifically am I preserving this against?
Where you stand if it goes wrong, and whether it goes wrong
Being first in line is the most reassuring phrase in this category, and it's worth being precise about what it tells you.
First in line describes where you sit after something has already gone badly. It's a statement about the order of a queue once the trouble has arrived. Whether the trouble arrives is a separate matter, and your place in the queue has nothing to say about it.
Both are worth knowing, and they are two different purchases. Your place in the queue buys you one of them.
The queue matters. It's answering a question about recovery, and the question in your head was probably about safety. Those got treated as the same thing somewhere along the way, and I'd guess the mix-up is old and mostly innocent.
So, the second question. There are 2 different things you could be buying here. A smaller chance of the thing going wrong. Or a better position for yourself if it does. The fund's paperwork will tell you your position. It can't tell you which of the two you came for.
Key points:
Being first in line tells you how much you get back after something has gone wrong.
Making it less likely to go wrong in the first place is a separate thing, bought separately.
This is the question to ask: was I buying a smaller chance of things going wrong, or a better position if they do?
The money that was there the whole time
I know an investor who kept a large piece of what they thought of as their safe money inside a whole life policy. They believed they could get to it whenever they wanted.
Then a private equity deal came along that they wanted to be in, and they went to get the money from the policy. That was the first time anyone looked at the terms closely. Getting to it meant borrowing against the policy, at a rate high enough to matter. They put the deal's income after tax next to that interest, and the deal stopped being worth doing. So they left the money alone and passed.
The product is not the point here and I have no verdict on it. The belief is the point. That money was never at risk and it never lost value. It did the first job perfectly, for years. The second job it was never able to do, and they only found that out standing in front of the deal they wanted. Nobody had misled them. They had decided years earlier that it was reachable money, and then they stopped checking.
Money sitting in T-bills or a money market account is doing that same first job. Also boring, also protecting a number, and reachable in a few days. From a distance the two look like the same kind of safe. At the moment you want to move, they behave nothing alike.
I have a smaller version of this running right now. Money of mine was due back last year. Then it was the start of this year. We are most of the way through 2026 and the answer is still this year. It may come back and the deal may be fine. What I have stopped assuming is that I know the date.
So, the third question, and it's the one I'd put to myself first now. Am I preserving the principal, or am I preserving what I could do with it? The answers point at different amounts, and sometimes at different places to put the money.
Key points:
An investor I know held safe money in a whole life policy and believed it was reachable. When a deal came along, reaching it cost more than the deal was worth, so they passed.
The money did the first job for years. It was never able to do the second one.
The date money comes back is a promise, not a fact.
This is the question to ask: am I preserving the principal, or the ability to use it?
Two kinds of waiting that look the same
One word covers both of these. Patient. And it hides the difference.
Patient capital waits because waiting is how it earns. You put money somewhere, you leave it alone, and leaving it alone is the work.
Preservation capital is standing by, holding itself ready for a decision it can't schedule in advance.
From the outside those two are hard to tell apart. In both cases money sits, nothing visibly happens, and you tell yourself that's fine. A product that locks your money up will describe your patience approvingly, and that's a compliment that costs the person paying it nothing.
Here's where it bites. Patient capital can accept a lockup and lose very little, because being unable to move is close to the point. Capital that's standing by loses its whole function the moment it can't be reached. Same product, same lockup, opposite result, depending only on which job you gave that money.
Say you put money into a startup that needs 8 to 10 years to turn into anything. If that money's job is to grow, the 8 years are the deal and you knew it going in. If its job was to be ready when something happened, you have handed away the readiness and kept the label.
So, the fourth question. Is this money waiting for a return, or standing by for a decision? If it's the second, then anything that makes it unreachable is quietly removing the thing you were buying.
Key points:
Patient capital earns through the waiting. Standing-by capital earns nothing from the wait and holds itself ready.
The 2 look the same from outside, and the industry uses one word for both.
A lockup costs patient capital very little and costs standing-by capital almost everything.
This is the question to ask: is this waiting, or standing by?
Final insight
I said at the top that I can't give you a percentage, and that's a real cost to you rather than modesty. You came with a sizing question. You're leaving without a size, and I'd rather say so plainly than invent something that sounds useful.
What I have instead is 4 questions:
What specifically am I preserving this against?
Was I buying a smaller chance of things going wrong, or a better position if they do?
Am I preserving the principal, or my ability to use it?
Is this money waiting for a return, or standing by for a decision?
None of the 4 can be looked up, which is the only reason they're here. Each one is about you rather than about the product, and that's why nobody outside your own head can size this. The percentage, whenever it arrives, comes after all 4.
So, here's what I'd like to know.
Of the money you'd describe as your safe money, how much of it is standing by for a decision you could actually name?
Hit reply and tell me the decision. You don't have to tell me the amount, the product, or where it sits.
I'll go first. Mine is money that was due back last year and still is not back. When I committed it I could not have told you what I would want it back for, and I still can't. That's the part I would do differently.
Most people who read this were sent it by someone they trust. If you're that person for somebody, forward it to them.
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Disclaimer: This is not financial advice. This material is for educational purposes only and not financial, legal, or investment advice. Private investments may be risky. Do your own research and consult licensed professionals before acting on anything specific to your situation.
Until Monday.
Alina
