I want to preserve the money I have so far and grow it. In Fisher Investments UK’s experience, many investors approach markets with this sort of mindset. It might seem logical – if your money is growing, the principal investment is technically preserved. But we don’t think it is possible to target both capital preservation and growth simultaneously. In Fisher Investments UK’s view, a deeper understanding of capital preservation can help explain why – and provide investors with realistic expectations. Allow us to explain.
Whilst we have seen various definitions, we view true capital preservation as an investing strategy that targets little to no fluctuation in a portfolio’s value. In other words, it aims to eliminate the risk of portfolio declines. But Fisher Investments UK’s reviews of market history show almost all securities, from equities and fixed interest securities to commodities and real estate, carry the risk of loss. Thus, investors truly seeking capital preservation probably want to avoid these in favour of cash and cash-like securities. Contrary to other assets, cash maintains its nominal value – i.e., one pound held in cash will be one pound a year from now. It doesn’t rise or fall much – hence, capital preservation.
However, we think this strategy has its own risks – namely, the amount of goods and services you can buy with that one pound will likely fall over time due to inflation (broadly rising prices across the economy). Since 2000, the prepandemic average annual inflation rate was 2.0%.i More recently, inflation has been even higher, registering 9.1% in 2022.ii But even at prepandemic rates, inflation is a risk to an all-cash portfolio over the long term, in Fisher Investments UK’s view. Whilst cash holds its value in the present, an all-cash portfolio would technically lose value in real (inflation-adjusted) terms over time, unless you earn something like bank interest in excess of inflation – a rarity in recent years, according to our research.
To help illustrate the implications of pursuing true capital preservation, consider a few hypothetical portfolios. Portfolio A holds 100% equities, Portfolio B holds 50% equities and 50% bonds, and Portfolio C holds all cash. History shows Portfolio A would experience the most short-term volatility whilst reaping the highest long-term returns.iii Portfolio B would probably see less growth than Portfolio A, but the bond holdings could dampen volatility, meaning fewer swings along the way.iv Portfolio C would experience almost zero portfolio volatility and growth, leaving its long-term return the lowest of the three.
In Fisher Investments UK’s view, investors must take on some level of risk to earn growth in their portfolio. Those who wish to experience little to no portfolio volatility in the short term must accept the high likelihood of little to no long-term returns. Now, we aren’t saying there is a best or worst portfolio in this scenario. In our view, it all depends on someone’s financial goals, objectives, time horizon and risk tolerance – which vary based on the investor. But if you require portfolio growth to attain your financial objectives, we think you must accept some form of downside risk.
In our view, investors who understand this are more likely to hold realistic expectations about capital preservation’s limits. For one, knowing how risk relates to growth can help prepare investors for what is coming. If an investor needs equity-like growth to reach their goals, they will have to experience some level of volatility tied to owning equities. We think it is inevitable over the long term. On the other hand, if they are targeting capital preservation, Fisher Investments UK thinks they benefit in accepting that their portfolio will not grow. It might maintain its value – at least in nominal terms – but capital preservation isn’t a strategy for those seeking market-like returns, in our view – and if the investor has to withdraw funds for living expenses, the account’s value will fall. Knowing this could influence one’s investment goals, lifestyle choices and other personal finance decisions.
We have also found holding realistic expectations can help investors identify potentially fraudulent investment offers. Over the years, we have seen numerous bad actors claim they can provide capital preservation and growth simultaneously – which we think is impossible. In reality, it is likely these people aren’t providing true capital preservation or their expected returns may not actually offer much growth. In Fisher Investments UK’s view, investors who understand capital preservation and growth’s mutual exclusivity are better suited to identify these kinds of schemes.
This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
i Source: FactSet, as of 13/7/2023. Statement based on average annual percent change in UK Consumer Price Index (CPI) (for UK, Denmark, Sweden, and Norway) and Harmonised Index of Consumer Prices (for eurozone), 2000 – 2019. CPI and HICP are government-produced measures of goods and services prices across the broad economy.
ii Source: FactSet, as of 13/7/2023. Statement based on year-over-year percentage change in UK CPI (for UK, Denmark, Sweden, and Norway) and HICP (for eurozone), 2022.
iii Source: FactSet and Intercontinental Exchange, Inc., as of 13/7/2023. Statement based on MSCI World Index with net dividends in pounds, 31/12/1969 – 31/12/2022 and ICE (NYSE:ICE) BofA Sterling Broad Market Index, 31/12/1996 – 31/12/2022.
iv Ibid.