What Is Conservative Investing?
Conservative investing is an investing strategy that prioritizes the preservation of capital over market returns. Conservative investing seeks to protect an investment portfolio's value by investing in lower-risk securities such as fixed-income and money market securities, and often blue-chip or large-cap equities. In a conservative investing strategy a full half or more of the portfolio will generally be held in debt securities rather than equities.
Understanding Conservative Investing
Conservative investors have risk tolerances ranging from low to moderate. As such, a conservative investment portfolio will have a large amount of low-risk, fixed-income investments and a small smattering of high-quality stocks or funds. Although a conservative investing strategy may protect against inflation, it may not earn significant returns over time when compared to more aggressive strategies. Investors are often encouraged to turn to conservative investing as they near retirement age regardless of individual risk tolerance.
Conservative Investing and Portfolio Strategies
Preservation of capital and current income are popular conservative investing strategies. Preservation of capital centers on maintaining current capital levels and preventing any portfolio losses. A capital preservation strategy incorporates safe, short-term instruments, such as Treasury bills and certificates of deposit. A capital preservation strategy could be appropriate for an older investor, looking to maximize her current financial assets without significant risks.
A current income strategy can be appropriate for older investors with a lower risk tolerance, looking for a way to continue to earn a steady flow of money post-retirement and without their usual salary. Current income strategies work to identify investments that pay above-average distributions, such as dividends and interest. Current income strategies, while relatively steady overall, can be included in a range of allocation decisions across the spectrum of risk. Strategies focused on income could be appropriate for an investor interested in established entities that pay consistently (i.e. without risk of default or missing a dividend payment deadline), such as large-cap or blue-chip equities.
Alternatives to Conservative Investing
Conservative investing strategies generally return less than more aggressive strategies, such as a growth portfolio. For example, a capital growth strategy seeks to maximize capital appreciation or the increase in a portfolio’s value over the long term. Such a portfolio could invest in high-risk small-cap stocks, such as new technology companies, junk or below-investment-grade bonds, international equities in emerging markets, and derivatives.
In general, a capital growth portfolio will contain approximately 65-70% equities, 20-25% fixed-income securities and the remainder in cash or money market securities. Although growth-oriented strategies seek high returns by definition, the mixture still somewhat protects the investor against severe losses. Investors who are familiar with the market and stock research can also find success in a value investing portfolio heavy on stocks or even a passively invested exchange traded fund (ETF) portfolio mixing stock and bond funds.