The huge risk in seeking ‘safety’ 

GOT acrophobia? Fear of heights is common around all-time stock-market highs – such as now.

With the Straits Times Index (STI) wobbling near record highs after summer’s stomach-turning volatility, many altitude-woozy investors seek “safety”. Enter sales brokers hawking poverty-producing products deemed “safe”.

You know the approach, offering equity-like growth and capital preservation. Don’t be fooled. Despite seeming sensible, these schemes are as real as world peace or zero-calorie chendol. Let me explain.

Rational goals and expectations are key to successful investing. Simply put, growth and capital preservation can’t coexist in the short term. Yet, achieving growth likely means reaping both in the long term.

Sounds confusing? It isn’t. It is just a matter of perspective.

First, record highs don’t indicate stocks’ direction. Global bull markets often feature multiple dozens of them.

Yet, fears abound now, with headlines touting global wars, supposedly too-little-too-late Chinese economic stimulus, America’s election chaos and “scary” potential policy impacts on Singapore. So many fears.

It all makes “capital preservation” seem smart. But a true capital-preservation strategy is unwise for most people. Why? True capital preservation means that your portfolio’s value can’t fall – eliminating volatility.

Sounds nice. But volatility and negativity aren’t synonymous.

Up 1 per cent and down 1 per cent are similarly volatile. And with stocks, volatility is overwhelmingly more often up. Eliminate the “down”, and the “up” disappears also – always.

To see this, consider the UK FTSE All-Share’s long history. Eliminating volatility means missing the 62.3 per cent of all months and 72.7 per cent of years since 1924 that it rose in pound sterling. Or, similarly, the US S&P 500’s 63.1 per cent of “up” months and 73.5 per cent of years that it gained in US dollars since 1925.

The MSCI Singapore Index – used here for its longer history than the STI – mirrors those trends, with the index up in 57.5 per cent of the months and 61.1 per cent of the years since launching in 1969.

Hunt for yield

True capital preservation is limited to cash or near-cash-like vehicles with meagre long-term returns. Yes, some of your big banks’ savings accounts yield 5 per cent or more – but myriad restrictions and eligibility criteria apply. Near-zero per cent rates are quite common; but not long-term growth.

Enter inflation. Singapore’s has averaged about 2.6 per cent annually since 1962. You saw far hotter inflation in 2022 and 2023. More recently, the Republic’s September consumer price index was 2 per cent year on year (yoy).

As I type, 10-year Singapore government bonds yield 2.86 per cent, while the 30-year one delivers 2.75 per cent. So, locking up your funds for 10 or 30 years may slightly outpace inflation. But maybe not.

Ditto for the US 10- and 30-year Treasuries’ respective 4.27 per cent and 4.52 per cent yields versus US inflation’s roughly 3.5 per cent long-term average (and September’s 2.4 per cent yoy). Plus, bonds can be volatile – as the big global bond swoon in 2021-2022 showed.

Even small inflation upticks could eat all your yield. Always remember: even mild growth requires some volatility. Without downside volatility, there is no growth upside – ever.

As unified investing goals, therefore, capital preservation and growth can’t coexist in the here and now. Anyone claiming otherwise is wrong.

Maybe they foolishly believe it, which is bad. Or worse, maybe they are hawking horrible products. Worst of all, maybe they are Ponzi-scheming rats such as America’s Bernard Madoff or Singapore’s Sunshine Empire, promising “upside with no downside”.

The more growth you need, the more short-term volatility to expect. Full stop.

If you need liquid, equity-like growth, expect volatility. Can’t stomach it? Expect lower returns, which may require reconsidering your goals – and your saving and spending rates.

The good news? A growth goal can preserve capital in the long term. How? Consider: in the 80 rolling 20-year periods from 1924 to now, the FTSE All-Share has never been negative. Never. It averaged a whopping 1,029 per cent in pound sterling in those spans.

The S&P 500’s 79 rolling 20-year periods were never down either – averaging 806 per cent in US dollars since 1925. That’s huge growth.

The past never guarantees the future. But it can help set reasonable expectations. Human nature changes far too slowly to diminish the profit motive’s power in any relevant timeframe. So, stocks should keep reaping positive inflation-adjusted returns in the long term.

Hence, a well-diversified equity portfolio will very likely grow over the coming decades – maybe by a lot – despite occasional sharp, shorter negativity bouts.

Capital preservation actually means curbing or capping growth. You almost surely end up with less after inflation – achieving neither goal.

Don’t let fear of heights scare you into fantastical, awful products doomed to disappoint. Instead, take the long view. It can look like you preserved initial capital... all while reaping growth.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally