Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street's Money-Killing Myths

BUNK 6

“CAPITAL PRESERVATION AND GROWTH” IS POSSIBLE!

... and I’ve got a unicorn to sell you.

“Capital preservation and growth” is something the investment industry babbles about a lot and folks crave—but it works as well as a one-calorie dessert. Basically, it’s the idea you can get some moderate amount of growth while preserving your capital and not experiencing pesky near-term volatility. Sounds wonderful! Most of the taste but none of the fat or calories! Everybody wants it. And many attempt it. But the result is far from what you’d like it to be. It sounds great but just isn’t possible. No more real than Santa Claus. Yet I’m consistently astounded at how many people—professionals even—believe this bunk.

True capital preservation requires absence of volatility risk—no downside, but basically no upside either. Because the one requires the other. I specify volatility risk because there are many kinds of risk—volatility is just one. There’s interest rate risk—that rates fall so when a bond matures you either must accept a lower yield or reinvest into something higher risk to get a similar yield. There’s also opportunity cost—the risk of not having enough risk, so you miss out on an alternative with potentially better longer-term performance going forward. Or inflation risk. There are near endless risk types—but folks aiming to preserve capital are usually most concerned with volatility.

For example, you could buy US Treasuries and hold them to maturity—that would be a capital ...