After a summer of volatility across global markets, many traders are likely craving safety. Those in search of a life boat in the current choppy conditions may turn to schemes offering both equity-like growth and capital preservation in the hopes of securing stability. But successful investing requires rational goals and expectations, and growth and capital preservation can’t coexist simultaneously. Yet achieving growth likely means reaping both long-term.
What does that actually mean? Let me explain. Ups and downs Recently, volatility struck on fears of the yen carry trade’s unwinding, German weakness dragging the eurozone, “too-slow-moving” central banks and America’s election chaos. On more than one instance the reaction to these threats was extreme - traders sold off stocks, markets tanked and billions of dollars and euros were wiped from global indices. So its easy to see why incorporating capital preservation while maintaining growth goals in enticing. But a capital preservation strategy is unwise for most people. Why? True capital preservation means your portfolio’s value won’t fall—the eradication of potential volatility. But volatility and negativity aren’t synonymous. A 1 per cent rise is just as volatile as a -1 per cent dip. And stocks’ volatility is much more often up than down. Eliminate the down and the up disappears, too. Consider America’s S&P 500 index for its longest accurate history: Eliminating volatility means missing the 63.1 per cent of months and 73.5 per cent of years US stocks rose (in USD) since 1926! Or, similarly, the 61.9 per cent of months and 74.4 per cent of years Irish stocks rose in euros and pounds since good data begin in 1984. Slow and steady True capital preservation is limited to cash or near-cash-like vehicles, delivering ultra-low long-term returns. Long-term growth? No! Irish banks’ deposit rates recently hit 15-year highs. But they average less than 3 per cent. 10-year Irish government bonds offer 2.63 per cent and 30-years 2.96 per cent. Yet bonds don’t eliminate volatility—as their stock-like 2022 global swoon proved. Enter inflation. Ireland’s averages about 4.4 per cent annually since accurate data collation started in late 1976—including the huge mid-1970s’ and early-1980s’ spikes. Over the past 40 years, it has averaged 2.5 per cent and July’s was 2.2 per cent year-on-year. So lock up your funds for 10 or 30 years, and you might beat inflation. Maybe not! US 10- and 30-year Treasurys’ respective 3.84 per cent and 4.13 per cent yields top US inflation’s roughly 3.5 per cent long-term annualised average… barely. Any inflation uptick eliminates any after-inflation return. Always remember: Even mild growth requires volatilit