Time to “lock in” 2024′s stock market gains? With the TSX hitting sporadic new highs – and this summer’s volatility – many investors seemingly have twinges of acrophobia and are seeking “safety.” Hence, strategies offering equity-like growth and capital preservation may seem increasingly alluring.
Don’t be fooled. Despite seeming sensible, such “strategies” are as real as world peace or zero-calorie Nanaimo bars – pure fiction. Yet many claim otherwise, hawking products destined to disappoint.
Successful investing requires rational goals and expectations. Put simply, growth and capital preservation can’t co-exist in the short term. Yet achieving growth likely means reaping both long-term. Confused? Let me explain.
Fear of heights is common around all-time highs, like now. But record highs don’t indicate where stocks are headed. Bull markets often feature dozens of them!
Still, fears abound, with headlines touting global wars, Canada’s pockets of economic weakness (supposedly requiring bigger central bank rate cuts), America’s election chaos and what the candidates’ “scary” policies will mean for Canada. So many fears. It all makes “capital preservation” sound smart. But a true capital preservation strategy is unwise for most people.
Why? True capital preservation means your portfolio’s value can’t fall – the eradication of volatility. Sounds nice! Eliminate stomach-churning wiggles like this summer’s!
But volatility and negativity are not synonymous. Up 1 per cent and down 1 per cent are similarly indicators of volatility. But with stocks, volatility overwhelmingly is up more often than down – by about two to one. Eliminate the down, though, and the up disappears also – always.
Consider the U.K.’s FTSE All-Share Index for its long history: Eliminating volatility means missing the 62.3 per cent of all months and 72.7 per cent of years it rose in sterling since 1924. Or, similarly, the S&P 500′s 63.1 per cent of up months and 73.5 per cent of up years since 1925 in U.S. dollars. The TSX’s 62.6 per cent of up months and 71.7 per cent of up years since its 1977 launch mirror those trends, albeit in a shorter timeframe.
True capital preservation is limited to using cash or near-cash-like vehicles, delivering ultralow long-term returns. Even your Big Five savings accounts deliver sub-2-per-cent returns – at best! You know near-zero-per-cent rates are common. Long-term growth? No! Canada’s 10-year government bonds offer more yield, but they don’t eliminate volatility – as 2022′s global bond plummet proved.
Enter inflation. Canada’s has averaged about 3.1 per cent annually since 1915. You saw far hotter inflation in 2022 and 2023. More recently, the September CPI was a cooler 1.6 per cent year-over-year.
As I type, 10-year Canadian government bonds yield 3.21 per cent while the 30-year deliver 3.35 per cent. So, locking up your funds for 10 or 30 years maybe outpaces inflation. But maybe not! Ditto for U.S. 10- and 30-year Treasuries’ 4.08-per-cent and 4.40-per-cent yields versus U.S. inflation’s roughly 3.5-per-cent long-term average (and September’s 2.4 per cent year-over-year).
Even small inflation upticks could eat all your yield. Always remember: Even mild growth requires some volatility. Without downside volatility, there is no upside. Ever!
Hence, as unified investing goals, capital preservation and growth can’t co-exist. Anyone claiming otherwise is wrong. Maybe they foolishly believe it – bad. Worse, maybe they are hawking horrible products. Worst of all, maybe they are Ponzi-scheming rats like America’s Bernard Madoff or Canada’s Greg Martel, promising “upside with no downside.”
The more growth you need, the more short-term volatility to expect. Full stop. If you need liquid, equity-like growth, expect volatility. Can’t stomach it? Expect lower returns, which may require reconsidering your goals and your saving and spending rates.
The good news? A growth goal can preserve capital in the long term. Sounds confusing. It isn’t.
How? Consider: In the 80 rolling 20-year periods from 1924 to now, the FTSE All-Share has never been negative. Never! It averaged a whopping 1,029 per cent in those spans. The S&P 500′s 79 rolling 20-year periods were never down either, averaging 806 per cent in U.S. dollars since 1925. Huge growth! Similarly, the TSX was never negative in its 27 rolling 20-year periods since 1977, averaging 478 per cent.
The past never guarantees the future. But it can help set reasonable expectations. Human nature changes far too slowly to diminish the profit motive’s power in any relevant timeframe. As such, stocks should keep reaping positive inflation-adjusted returns in the long term.
Hence, a well-diversified equity portfolio will very likely grow over the coming decades – maybe a lot – despite the occasional sharp, shorter negativity bout. Capital preservation actually means curbing or capping growth. You almost surely end up with less after inflation, achieving neither goal.
Anyone hyping growth with capital preservation peddles the impossible. Don’t let a fear of heights scare you into their fantastical, poverty-producing products. Instead, take the long view. It can look like you preserved initial capital – all while reaping growth.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.