The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes

Chapter Five

The Holy Grail—Capital Preservation and Growth

“You can have capital preservation and growth at the same time!”

If someone offered you a “capital preservation and growth” strategy, would you take it? Sounds pretty good. Who doesn’t want all the benefit of equity-like upside growth with downside capital protection? Both at the same darn time!

And who doesn’t want to eat rib-eyes and ice cream sundaes every night but never gain weight?

The idea you can pursue capital preservation and growth at the same time as a unified goal is no different than the notion of a low-cal, fat-free, guilt-free rib-eye-and-sundae dinner. It’s a fairytale.

Capital Preservation Requires No Volatility . . .

First, let’s clear up common misperceptions about capital preservation. It’s a goal likely appropriate for fewer people than you think. And if you think it’s something you want (or need) long term, ask yourself why. True capital preservation means your portfolio’s absolute value should never fall.

And to do that—true capital preservation—you must eliminate most all volatility risk. (As discussed in Chapter 3, volatility isn’t the only risk investors must consider.) But if you eliminate volatility risk, you not only avoid the times stocks are down, you avoid the 72% of all years stocks are up! Effectively, you’re limited to cash or near-cash vehicles, which means likely seeing purchasing power eroded over time by inflation.

Sure, you could get better-than-cash returns by investing in Treasurys. ...