World peace. Zero-calorie cheesecake. Smart politicians. your Profit from heart.
As with these pipe dreams, there are no investment strategies that promise both growth and and Capital preservation is a false truism. A myth. But so many vendors of all stripes will claim otherwise, especially during volatile times like this summer, and sell you a poor product that will disappoint you.
Reasonable expectations are the key to successful investing. Growth and true capital preservation cannot coexist in the short term. But to achieve growth, you will likely need to achieve both in the long term. Confused? Let me explain.
“Capital preservation” may seem attractive and even sensible given recent stock market volatility and unsettling election news, but true capital preservation strategies are wise for a much smaller number of investors than most would imagine.
Why? True capital preservation means ensuring that your portfolio does not decline in value, i.e., eliminating any underlying risk. VolatilitySounds good, it removes the stomach-churning ups and downs. But volatility is not the same as negativity. A 1% rise is just as volatile as a 1% fall.
The key takeaway here, and one that can be hard to understand, especially for market-obsessed investors, is this: Volatility is your friend. With stocks, volatility goes up a lot more than it goes down. Eliminate the “downs” and you eliminate the “ups.”
For example, if you excluded volatility, you would miss out on 63.1% of the calendar months when US stocks rose (and 73.5% of all calendar years from 1925 to 2023). In fact, true capital preservation is limited to extremely low yielding cash or cash-like instruments. Growth? No.
Treasury bonds offer better long-term returns than cash, but they don't eliminate volatility, as the stock-like selloff in bond prices in 2022 proved. Bond prices and yields mechanically move in opposite directions, so rising long-term interest rates erode bond returns.
Inflation is here. Although it has risen sharply recently, the long-term average annual interest rate in the United States is about 3.5%, and is currently about 2.5%. The yields on 10-year and 30-year Treasury bonds are 3.7% and 4.0%, respectively. If you lock in your money for 10 or 30 years from now, perhaps That's above the rate of inflation. But what happens if inflation reaches or exceeds its historical average? Savers could lose out.
Even with slight growth need Volatility. This is the opposite of capital preservation. Remember, without downside volatility there is no upside. Never.
Thus, capital preservation and growth cannot coexist as unified investment goals. If someone tells you otherwise, they are wrong; they probably foolishly believe it. Even worse, they may be peddling a terrible product, such as an insurance-like “buffered” fund. Even worse, they may be a Bernie Madoff-style con man selling the “upside without the downside.”
Real growth requires short-term volatility. That's all. Can't stand it? Expect lower returns and you may need to re-examine your goals, savings and future spending rates.
But there is good news. Capital preservation and growth are Combined Goals, results of pursuit Long-term growth There is a good chance of capital preservation over time.
Consider this: The S&P 500 was up in 82 of the 94 five-year periods from 1925 to 2023. It was also up in 84 of the 89 ten-year periods. Never Looking at the past 20 years, the average decline is 806%.
The past never guarantees the future, but it can help set reasonable expectations: as long as profits motivate people and we live in a quasi-capitalist world, stocks should deliver big gains in the long term.
So a well-diversified stock portfolio is likely to grow substantially over the next few decades, despite some steep negative spikes along the way. So, given a very realistic investment horizon, Look Like we achieved significant growth while still maintaining our initial capital. But it all started with a desire for growth.
Those who sell growth with capital preservation are selling a rumor mill so they don't ruin your financial future and then treat you to a high-calorie cheesecake out of their profits.
Ken Fisher is founder and chairman of Fisher Investments, a four-time New York Times bestselling author and writer of regular columns in 21 countries around the world.
