World peace. Calorie-free cheesecake. Sensible politicians with your interests at heart.
Like all these pipe dreams, investment strategies promising both growth and capital preservation are phony baloney. Fiction. Yet so many vendors in varied forms – especially in rocky times like this summer’s – claim otherwise, peddling poor products destined to disappoint.
Rational expectations are key to successful investing. Growth and true capital preservation can’t coexist in the short run. However, achieving growth likely means accomplishing both in the long term. Confused? Let me explain.
“Capital preservation” sounds appealing and even prudent given the recent chop and fearful election headlines. But a true capital preservation strategy is wise for far fewer investors than almost anyone imagines.
Why? True capital preservation means your portfolio’s value shouldn’t fall – the eradication of potential volatility. Sounds nice – get rid of those stomach-churning ups and downs! Yet volatility and negativity aren’t synonymous. A 1% rise is similarly volatile to a 1% dip.
Here’s what’s crucial – and especially tough for market-addled investors to digest: Volatility is your friend. With stocks, volatility is much more often up than down. Eliminate the “down,” and the “up” also disappears.
Nixing volatility would mean, for example, that you miss out on the 63.1% of calendar months US stocks rose (and 73.5% of all calendar years from 1925 – 2023). Indeed, true capital preservation is limited to ultra-low-returning cash or cash-like vehicles. Growth? No.
Treasury bonds offer better-than-cash long-term returns, but they don’t eliminate volatility, as 2022’s stock-like bond price plummet proved. Bond prices and yields move inversely, mechanically so. Hence, rising long-term rates slaughter bond returns.
Enter inflation. While it soared recently, America’s long-term annual average is about 3.5%, running about 2.5% now. Ten and 30-year Treasurys yield 3.7% and 4.0%, respectively. Lock up your funds for 10 or 30 years now, and maybe you outpace inflation. But what if inflation averages its historic average or higher? Savers can be losers.
Even mild growth requires volatility. It is the opposite of capital preservation. Don’t forget: Without downside volatility, there is no upside. Ever.
Hence, as unified investing goals, capital preservation and growth can’t coexist. If someone says otherwise, they’re wrong. Maybe they foolishly believe it. Worse, maybe they hawk awful products – insurance-like, “buffered” funds or others. Worst, maybe they’re crooks touting “upside with no downside,” a la Bernie Madoff.
For real growth you need short-term volatility. Full stop. Can’t stomach it? Expect low returns which may require reconsidering your goals, savings and future spending rates.
But there is good news. While capital preservation and growth don’t work as a combined goal, a result of pursuing long-term growth is likely to preserve capital in time.
Consider: The S&P 500 rose in 82 of 94 rolling 5-year periods from 1925 to 2023. And 84 of 89 10-year periods. It has never been negative over any rolling 20-year span, averaging 806%.
The past never guarantees the future, but it does help set reasonable expectations. So long as profits motivate people and we have a quasi-capitalistic world, stocks should deliver significant long-term returns.
Hence, a well-diversified equity portfolio is very likely to grow over coming decades—maybe a lot—despite bouts of sharp negativity en route. Hence, if you consider that very realistic investing time horizon, it may look like you achieved big growth while preserving initial capital. But it all stemmed from pursuing growth.
Those peddling growth with capital preservation sell a siren’s song. Don’t let it shipwreck your financial future. And from your profits, have some calorie-rich cheesecake on me.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.
