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In Fisher Investments UK’s experience, many investors say they wish to prioritise avoiding declines in their portfolios’ value – an investing goal known as capital preservation. We have also found those same investors tend to recognise the need for some growth after assessing their other personal financial objectives. But in Fisher Investments UK’s view, these two approaches – capital preservation and growth – can’t coexist. A deeper dive into true capital preservation reveals its rarity as an investment goal. Allow us to explain.

Whilst we have seen varying definitions amongst financial publications we monitor, we define true capital preservation as a strategy that targets no fluctuations in a portfolio’s value (notwithstanding the investor’s withdrawals, that is). It is the goal of eliminating the risk of portfolio declines. Because our research shows the huge majority of assets – fixed interest securities, equities, real estate, art, commodities, gold, etc. – have volatility, someone seeking true capital preservation as their chief goal is limited in what they can hold. Usually it amounts to cash or cash-like securities, as they are the most liquid assets available (meaning they are easy to sell quickly without having to accept a discounted price) and their value is stable (i.e., it doesn’t rise or fall much).

We acknowledge the theoretical appeal of capital preservation, but in Fisher Investments UK’s view, the goal has shortcomings. A major one we have identified: it implies the prospect of portfolio declines is the only investing risk. Yet we think others exist, too. Take the risk of inflation (broadly rising prices across the economy). Inflation’s annual average since 2000 is 2.0%, and it has been much higher than that this year.i Should inflation’s historical annual average persist or climb over the next 20 years, inflation is highly likely to outpace an all-cash portfolio that generates no growth. If, as it is now, it runs hotter, so much the worse. Even though cash and cash-like securities maintain their value today, inflation can reduce their purchasing power over time.

Now, capital preservation may make sense if you have enough money to satisfy all your cash flow needs now and over your investment time horizon, which Fisher Investments UK defines as the entire length of time an investor needs their assets to work toward their goals. Targeting capital preservation may also make sense if your funds are earmarked for a near-term expense. However, this approach presumes you have no desire to grow your portfolio, which is rare amongst investors, in our experience. Instead, we have found most investors require at least some growth to achieve their personal goals, which can include meeting future cash flow needs, maintaining purchasing power against inflation, and/or providing for wants beyond the portfolio owner’s lifetime (i.e., leaving something for heirs, an organisation or other legacy reasons).

To obtain that growth, Fisher Investments UK thinks investors must take on some risk – and that means occasionally enduring portfolio declines over the short term. There are degrees to this, as our research shows there is a spectrum of risk and return. For example, we find government fixed interest securities tend to experience fewer fluctuations in the short term – a contrast to equities, which generally go through greater short-term movement both to the upside and downside. Over the longer term, though, equities have provided higher returns than fixed interest based on our review of market history.ii

We think equities’ short-term fluctuations are the price one pays for their historically stronger returns over the long run. Depending on an individual’s specific goals, time horizon and risk tolerance, owning securities that provide growth – e.g., equities, perhaps mixed with some fixed interest securities depending on the situation – makes sense for many investors, in our view.

Moreover, we think it is critical for investors to understand capital preservation and growth can’t exist as a singular investment goal. Both have tradeoffs. If growth or generating cash flow to help meet expenses is needed, Fisher Investments UK thinks investors benefit from preparing themselves for temporary portfolio declines – they are unavoidable on the journey to the longer-term market returns that help attain those objectives. If capital preservation is the goal, we think an investor must accept their portfolio’s value may not decline, but neither is it likely to attain anything approaching equity-like growth or hold its value relative to inflation – which may not produce sufficient enough returns to achieve their investing desires. By setting their goal expectations properly, investors can make decisions that align with what they want their portfolio to provide whilst also recognising the related compromises they may have to make.

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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, 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 7/6/2022. Statement based on average annual percent change in the UK CPI, 2000 – 2021, and year-over-year percentage change in UK CPI, January 2022 – April 2022.

ii Source: FactSet and Intercontinental Exchange, Inc., as of 7/6/2022. Statement based on MSCI World Index with net dividends in pounds, 31/12/1969 – 31/12/2021 and ICE BofA Sterling Broad Market Index, 31/12/1996 – 31/12/2021.