... and I’ve got a unicorn to sell you.
“Capital preservation and growth” is something the investment industry babbles about a lot and folks crave—but it works as well as a one-calorie dessert. Basically, it’s the idea you can get some moderate amount of growth while preserving your capital and not experiencing pesky near-term volatility. Sounds wonderful! Most of the taste but none of the fat or calories! Everybody wants it. And many attempt it. But the result is far from what you’d like it to be. It sounds great but just isn’t possible. No more real than Santa Claus. Yet I’m consistently astounded at how many people—professionals even—believe this bunk.
True capital preservation requires absence of volatility risk—no downside, but basically no upside either. Because the one requires the other. I specify volatility risk because there are many kinds of risk—volatility is just one. There’s interest rate risk—that rates fall so when a bond matures you either must accept a lower yield or reinvest into something higher risk to get a similar yield. There’s also opportunity cost—the risk of not having enough risk, so you miss out on an alternative with potentially better longer-term performance going forward. Or inflation risk. There are near endless risk types—but folks aiming to preserve capital are usually most concerned with volatility.
For example, you could buy US Treasuries and hold them to maturity—that would be a capital preservation strategy. You wouldn’t want to actively trade them—even US Treasuries can and do lose value. (See Bunk 1.) Make no mistake—you can experience near-term volatility even with Treasuries.
Still, buying and holding Treasuries to maturity would preserve capital, but likely yield little. As I write this in 2010, 10-year Treasury rates are under 3 percent. Even a little inflation wiggle could wipe that out. Yet that’s still better than what you get in a money market account—likely less than 1 percent in 2010. That’s capital preservation.

True Capital Preservation as a Goal Is Very Rare

In my experience, capital preservation as a long-term goal is rare. Most people want some growth—whether to simply outpace inflation, improve the odds their portfolios stretch to provide cash flow long term, or maximize their portfolios to leave more to kids, grandkids charities, the save-the-manatees league—whomever or whatever. The degree of growth investors want varies, but some growth is a more common goal. Real capital preservation, as the term is usually applied, still means you can lose purchasing power—through the ravages of an uptick in inflation (Bunk 30). Never forget—at a pretty normal 3 percent inflation rate, a buck today would be worth about half that in 20 years. That’s why true capital preservation is actually a fairly rare goal.
Over short periods, it’s totally different! For example, lots of folks have very short time horizons for certain pools of assets (e.g., when saving for a down payment for a house in a year or two). Then it makes good sense to take little risk. Stocks can and do correct fast even during bull markets. To quickly fall 17 or 18 percent or so and recover is normal—but that can be devastating for short-term money. And if you’re saving to buy a house, that is short-term money.
But to get growth, even a modest amount, you must accept some volatility risk, which means stepping away from the concept of true capital preservation. Doesn’t have to be all stocks! You could have 10 percent of your portfolio in stocks and the rest in Treasuries. That might give you some growth—not much overall. But still, even in that overall fairly nonvolatile portfolio, the stock portion would be volatile and you would have stepped away from pure capital preservation.
“Capital preservation and growth” as a goal is a lie. No nice way to say that. If someone sells it to you, they’re either a charlatan or misinformed. If the first, run away. If the second, still run away. Do you want someone managing your money who doesn’t understand the very simplest basics of finance theory and economic fundamentals?
Let me completely reverse everything I’ve just said and say that, yes, capital preservation and growth as an outcome is possible. Over long periods, if you’ve grown your portfolio, you’ve also inherently preserved capital, looking backward. In all the 20-year periods since 1926, stocks have never been negative at the end.1 (See Bunk 1, 2, or 3.) Not once. Some periods, stocks have had bigger growth than others, but always some growth. But achieving growth and capital preservation that way comes from and is linked directly to the growth goal. It has nothing to do with a capital preservation goal. It’s subject to complete stock market volatility in the short term—and it’s not what people normally think of when they think of “capital preservation.”
If your aim is truly to preserve capital in the short term, you can’t get much growth at all. History says the best way to get growth and, as a secondary benefit, preserve your capital is via stocks and thinking very long term.
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