Fisher Investments reviews the reality of a capital preservation approach for investors

The promise of risk-free financial growth is a bit like calorie-free cheesecake – tempting in theory, but misleading in reality. When markets experience negative volatility, it’s common to see renewed interest in strategies claiming to offer the best of both words: capital preservation and portfolio growth.

However, Fisher Investments believes portfolio growth stems from balancing capital growth with prudent risk-taking. Meaningful growth toward long-term financial goals requires investors to accept some degree of short-term volatility.

In this article, Fisher Investments reviews how equities experience short-term volatility, yet deliver higher average annual returns over time. We explore how accepting equity-like volatility is the cost of achieving long-term capital growth. Additionally, we discuss why relying solely on capital preservation can fail to counter inflation and could ultimately hinder your ability to reach your long-term financial goals.

Short-term volatility, long-term growth

Equities are notorious for their short-term ups and downs. Market corrections, economic crises and geopolitical shocks can trigger abrupt market declines that can unsettle even the most seasoned investors. However, history shows that, despite these fluctuations, equities have consistently delivered higher average annual returns over extended periods compared with other common asset classes such as fixed interest.i These extended timeframes are particularly relevant for investors nearing retirement, as retirement itself can span two to three decades. For instance, the MSCI World Index delivered an average annualized return of approximately 6.3 per cent between 2000 and 2024.ii That period includes some challenging periods for the global economy, such as the global financial crisis and the ensuing Great Recession.

While individual years may show losses, the longer-term trend is positive. For example, in 2008, the MSCI World fell nearly 40 per cent.iii However, those who remained invested in equities through the downturn were rewarded as markets recovered in subsequent years. By 2013, the MSCI World had not only recovered its losses, but it had also reached new record highs, underscoring the importance of maintaining staying disciplined during turbulent times.

In Fisher Investment’s view, staying invested in the face of negative market volatility can feel challenging, but keeping a long-term perspective often pays off.

The trade-off between risk and return

Finance theory tells us higher returns come with commensurate levels of risk. While this trade-off may seem straightforward, its implications are significant, especially for investors working toward long-term goals, such as retirement or building generational wealth. The truth is that many investors need long-term growth in their portfolios to achieve their goals. For these investors, higher returns are the reward they receive for accepting – and enduring – short-term turbulence.

Consider two portfolios: one with a 100 per cent equity allocation and the other fully invested in fixed interest.

On average, according to historical data Fisher Investments has reviewed, the all-equities portfolio would exhibit greater volatility (8.5 per cent as measured by standard deviation*) than the all-fixed interest portfolio (5.0 per cent) over shorter-term time periods (five years).iv The reward for the all-equities portfolio’s greater short-term volatility is higher average returns (10.2 per cent for equities versus 5 per cent for fixed interest).

What about longer time periods? Since reliable data began in 1926, an all-equity portfolio’s long-term average annualized return over 30-year rolling periods is 11.0 per cent, far exceeding global fixed interest’s 5.5 per cent.v The kicker? Equities’ standard deviation* is lower than fixed interest over 30-year periods.vi Put another way, equities may be riskier than fixed interest in the short term, but that isn’t the case over longer periods of time. Plus, that disparity in average annualized returns, compounded over time, might mean the difference between investors hitting and missing their long-term investment goals.

Fisher Investment feels that, over the long term, you should view temporary swings in the market as stepping stones – not obstacles – on the path to successfully achieving your long-term financial goals.

Capital preservation struggles to beat inflation

Choosing to avoid short-term volatility might feel like the “safe choice,” but relying primarily on lower-risk, lower-return investments can come with a hidden challenge many overlook: inflation. Over time, inflation erodes purchasing power, making it difficult for low-return investments to keep pace with your spending needs.

While your portfolio might cover your needs now, its purchasing power could fall short in the future as inflation chips away over time. Investments focused solely on preserving capital, such as low-yield fixed interest or savings accounts, are rarely designed to outpace inflation, potentially making them an unsustainable long-term strategy for most. They may offer short-term stability but often lack the growth most investors need to maintain their standard of living throughout a long retirement.

For instance, from 2000 to 2024, global inflation averaged about 4.2 per cent per year.vii This means just to maintain your current purchasing power, your investments would need to return at least 4.2 per cent. During those years, global equities delivered a 6.3 per cent annualized return. Global government bonds, on the other hand, barely outstripped inflation with a lower annualized return of just 4.4 per cent.viii Investors reliant principally upon fixed interest to provide growth to their portfolio during this period likely would have been disappointed.

That said, fixed interest still can play a valuable role. For investors looking to cushion against short-term market volatility and generate coupon income, fixed interest can serve as an important component of a broader portfolio. However, for most retired investors looking at a decades-long retirement, we believe equity-like growth is likely necessary to sustain purchasing power throughout retirement.

In Fisher Investment’s view, if investors can tolerate the short-term turbulence of equity markets, they will likely benefit from higher average returns with ultimately lower risk over longer time periods.

Fisher Investments reviews why equities are essential for portfolio growth

Equities are vital for driving the long-term capital growth many investors need to reach their financial goals. While equities are naturally volatile, Fisher Investment believes this volatility is the price of achieving the higher long-term returns they historically provide.

Relying solely on capital preservation may feel comfortable in the short term but often fails to protect against inflation and can ultimately hinder you from reaching your long-term goals. By understanding the relationship between risk and reward, staying focused on your long-term goals and remaining disciplined through market gyrations, you can increase the probability of reaching your long-term financial goals.

Read Fisher Investments’ additional reviews of markets and financial topics.

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 is no guarantee of future returns. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

Fisher Investments Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.

Advertising feature produced by Fisher Investments. The Globe’s editorial department was not involved.