Capital preservation AND growth – the Utopian achievement for all investors.

The idea of concurrent capital preservation and growth is that you get capital growth over time without losing a single dime. Your portfolio is practically immune to all kinds of short term volatility.

It means, there is zilch realized or unrealized capital loss, coupled with guaranteed capital return.

Having one’s cake and eat it too.

Here are a few case studies why this is as good as reviving salted fish, or running your automobile on water.

Case Study 1 : Fixed Deposit Account

“Investing” in fixed deposit is synonymous with capital preservation in risk-averse investing.

There is also an alternative to fixed deposit, and that is capital guaranteed fund, in KC’s previous article here.

However, the fact is that, even people who put their money in fixed deposit accounts yearn for some capital growth; despite having to contend with very low return due to fear of losing their principal.

If capital preservation were your sole objective, you would have locked your money away in a safe.

But is your money really growing? At best, bank fixed deposit rates are just on a par with inflation rates.

So, if you naively thought that your money is growing, it really isn’t. You need to understand the time value concept of money for this to make sense.

Now, after reading this, are you able to discern that your value of money is actually constant, if not depreciating?

Nonetheless, you definitely succeeded in preserving your capital here.

This explains that capital preservation and growth cannot co-exist.

Case Study 2: Apple Inc

Let’s talk about the stock price of Apple Inc. (AAPL)

There is no any other company with growth as impressive as Apple Inc for the past 5 years. Apple’s stock price and success is the epitome of growth.

If you took a long position in AAPL  (when its stock price bottomed during the 2008 recession) until today, you would have grown your money by five fold. This is speaking from own experience as I did hold Apple Inc stocks in 2008. Read my previous post here : Most Costly Investment Mistake – Apple Inc, My True Story

But during a period between August 2008 and March 2009, Apple stocks dropped by more than 50 percent, as stock market crashed.

Apple Inc 2008 stock price crash

As you can see for yourself, growth and capital preservation really don’t go hand in hand. To enjoy long term growth, one needs to stomach short term volatility.

Case Study 3: Mutual fund

On the local front, we take an example from the one of the best performing mutual funds for the past 10 years – OSK UOB Kidsave Unit Trust Balanced Fund.

It  won Lippers Awards of Excellence for 10 years category in 2011 and 2012.

OSK UOB Kidsave Lippers AwardsSource: Thomson Reuters

I have a position in this fund since May 2011, with entry price of RM 0.5509 and RM 0.5405.  Short term market volatility has caused the NAV price to dip below RM 0.53 by end of September 2011.

OSK UOB MY

OSK UOB Kidsave

Source: Bloomberg

It is obvious that a 10 years period award-winning fund is not judged by its short term return, but by its performance over long period of time.

Again, this shows that long term is synonymous with growth, while short term means volatility.

OSK UOB Kidsave

Source: FundSupermart

Food for thought

Capital preservation per se as long term investment goal is rare.

It makes you lose purchasing power; at best, it keeps you on par with inflation rate.

True capital preservation goal can only be achieved with absence of volatility. No downside, but no upside either. Because one requires the other.

To get even modest growth, one needs to embrace volatility risk, which means stepping away from the concept of true capital preservation.

To sum it all, guaranteed capital preservation and growth together is misstatement. Someone who guarantees you not to lose a dime in any investment return while earning huge returns could be a swindler or misguided. If it’s the former, run away fast! And if it’s the latter, still run away. Because he who doesn’t comprehend the simplest basic of finance and economic fundamentals should not be selling you financial product.

Our action plan and key takeaway

The best way to get growth and its secondary benefit, capital preservation, is to think long term.

Very long term. At least 3 years, but optimally, 5 to 7 years. That’s when you normally have a full business cycle. I am also getting this inside my head now – think long term…think long term… 🙂 .

Investing for long term growth means screening for an investment vehicle which maximizes return, while minimizing volatility. For mutual funds, one way to do this is to quickly check the Sharpe ratio of a fund and compare it with other funds in its class. See my previous write up here: Unit Trust Risk-Return Part 1: The Sharpe Ratio

Of course, there are also many other options such as real estate. If you are a veteran investor (I am surely not 🙂 ), please share your investing story below. I am sure the rest of us who wants to grow our money for financial freedom would benefit abundantly from your experience.

*This post was a result of a short but inspiring article published in Personal Money March 2012 issue: Capital preservation AND growth?. The article excerpt was reproduced from the New York Times bestseller by Ken Fisher – Debunkery: Learn It,Do It and Profit from It – Seeing Through Wall Street’s Money-Killing Myths.

LCF is an engineer with keen interest in financial planning and investing. He maintains a blog at LCF on Personal Finance, which aims to spread financial literacy to the masses through practical and simplified how-to money tips.


CF Lieu
CF Lieu

CF Lieu (CFP) is an independent financial adviser and maintains an active vlog at http://www.howtofinancemoney.com/

    3 replies to "Capital Preservation and Growth is Overrated – Here’s Why (Real Case Study)"

    • Netmask8

      Greetings + G’Day,

      Good example of Apple Inc (AAPL) stock grew by five fold since 2008.. If you got LAS VEGAS SANDS (LVS) , it grew by at least 35 folds if u got it at USD 1.50 ( 6th – 9th March 2009) and present price = USD 59 ( 20th March 2012) ..

      LVS aims for Japan, Spain, Vietnam ‘s new casinos licenses. there.. Sands Cotai Central (Macau) with 5800 rooms, at least 500 gaming tables openning in 11th Apr 2012 .. Happy Browsing + Searching for INFO ..

    • Netmask8

      Another example is XL Group (XL) :- If u manage to get it at USD 2.90 ( 30th Jan 2009) and present price = USD 21 ( 20th March 2012) , It grew it portfolios by 7 folds … If u sell it now(assume) and bring it back/convert it to RM, it will be huge sum percentage capital gain ..

      Apple Inc(AAPL) is expensive and for local salaried M’sian(earn in RM), it very hard to grab AAPL in big /large quantity(units) with bigger currency and expensive price. No many units able to grab for local ppls to buy this stock..

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