Imagine a financial strategy promising both capital preservation and growth.

It’s like craving a daily feast of rib-eyes and ice cream sundaes without the calorie count. Tempting, right?

But just as that perfect diet is a fantasy, so is the notion of achieving capital preservation and growth together.

Capital Preservation: A Zero Volatility Game

Capital preservation is often misunderstood. It’s not for everyone, and if it’s your long-term goal, ponder why.

True capital preservation means your portfolio never dips in value. This requires eliminating nearly all volatility risk.

However, by doing so, you miss out on the 72% of years when stocks rise.

You’re left with cash or similar assets, vulnerable to inflation’s erosive effects.

You might consider Treasurys for slightly better returns, but they come with a catch.

Treasurys can fluctuate in value, leading to potential losses if sold before maturity. This contradicts the essence of capital preservation. Moreover, with historically low interest rates, there’s a real chance of lagging behind inflation, especially if you lock in for long periods like 30 years.

Growth: Embracing Volatility

On the flip side, growth, even modest, demands some volatility risk. It’s the antithesis of capital preservation.

Without the risk of downsides, there are no upsides.

Wanting more “upsides” doesn’t make you greedy; it makes you thoughtful. Your future is hard to forecast & the best way to prepare for whatever may come is to have more.

People never regretted having a little more money as a retiree.

Remember, stock markets are more often up than down, and growth necessitates accepting this volatility.

The Incompatibility of Dual Goals

Thus, capital preservation and growth cannot coexist as a single goal. It’s a physical impossibility to have only upside without any downside.

If someone claims otherwise, they’re misleading you, whether intentionally or not.

The more growth you seek, the more short-term volatility you must be prepared to handle.

The Long-Term Perspective

However, if you focus on long-term growth, you might inadvertently achieve capital preservation. Historically, over 20-year periods, stocks have consistently shown positive returns, often outperforming bonds. While the past doesn’t guarantee the future, it suggests that a well-diversified equity portfolio is likely to grow significantly over two decades, preserving your initial capital through the ups and downs.

The Reality Check

Anyone promoting capital preservation and growth as a joint objective is either misinformed about financial theory or attempting to deceive you.

In the end, understanding the distinct nature of these goals and the inherent trade-offs is crucial for realistic financial planning.