Conservative Investing: Definition, Strategy Goals, Pros and Cons

What Is Conservative Investing?

Conservative investing is an investment strategy that prioritizes the preservation of capital over growth or market returns. Conservative investing thus seeks to protect an investment portfolio's value by investing in lower-risk securities such as blue chip stocks, fixed-income securities, the money market, and cash or cash equivalents.

In a conservative investing strategy more than half of a portfolio will generally be held in debt securities and cash equivalents rather than equities or other risky assets. Conservative investing can be contrasted with aggressive investing.

Key Takeaways

  • Conservative investing prioritizes preserving the purchasing power of one's capital with the least amount of risk.
  • Conservative investment strategies will typically include a relatively high weighting to low-risk securities such as Treasuries and other high-quality bonds, money markets, and cash equivalents.
  • One may adopt a conservative outlook in response to a shortening time horizon (including older age), the need for current income over growth, or a view that asset prices will decline.

Understanding Conservative Investing

Conservative investors have risk tolerances ranging from low to moderate. As such, a conservative investment portfolio will have a larger proportion of low-risk, fixed-income investments and a smaller smattering of high-quality stocks or funds. A conservative strategy necessitates investment in the safest short-term instruments, such as Treasury bills and certificates of deposit.

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 (T-bills) and certificates of deposit (CDs). 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, who are 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.

Sometimes, investors who are otherwise more aggressive will temporarily adopt a conservative strategy if they feel that the markets will take a negative turn. This could be due to over-heating asset prices or indicators of an economic recession on the horizon. In such instances, this shift to safer assets is called a defensive strategy, designed to deliver protection first and modest growth second. After the market has adjusted, they may adopt a more offensive or aggressive strategy once again.

Conservative investors can look to inflation-adjusted investments, such as Treasury inflation-protected securities (TIPS), which are issued by the U.S. government, to mitigate the effects of inflation on low-risk, low-return investments.

Alternatives to Conservative Investing

Conservative investing strategies generally have lower returns 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.

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