Think of capital destruction as not getting your money back, no longer how long you wait.
As an investor, you have plenty of options to chose from. They key to investing is to make to try to avoid capital destruction at all costs. Remember the lesson on volatility. Volatility is price movement up and down. Volatility is not capital destruction.
Ways of Capital Destruction
Emotional Investing: if you tend to get emotional due to price volatility, when investing and tend to panic when prices are low and get excited when prices are high, you are effectively buying high and selling low. Over time, this can lead to capital destruction.
Speculative Investing: If you are investing based on hope for a “home run” in speculative companies that may or not be profitable on the foreseeable horizon, and the outcomes are wide, this can lead to capital destruction. If the speculative company goes bankrupt, this can lead to capital destruction as there is no way to get your equity investment back.
Bond Defaults: if a bond defaults and you get less than your original investment, you have experienced capital destruction. Often times, chasing the highest yielding bonds results in higher risks and higher risks of default.
Ways to Reduce Risk of Capital Destruction
Become a Rational Investor: perform your full due diligence on an investment before investing. set a plan of action before your investment moves higher or lower and take action when it is time to do so.
Focus on Higher Quality Investments: although potential return may be less and/or somewhat boring, investing in high quality, moderately valued, growing companies managed by strong management teams can lead to long-term success
Be Wary of the Highest Yielding Bonds: even if a bond pays a significantly high yield, the potential for default may be also so high that in times of stress, the bond issuer may default. avoid the lowest quality bonds and focus on those with stronger fundamentals.
Stay Diversified: while you cannot avoid all possibilities of capital destruction, by diversifying your investments across asset classes, geographies, sectors, investment styles, etc. can reduce your risk of capital destruction from any one investment