What Is Conservative Investing?
Conservative investing is an investment strategy that prioritizes the preservation of capital over growth or market returns. Conservative investing thus tries 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 the greater part 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.
Understanding Conservative Investing
Conservative investors have risk tolerances going from low to moderate. In that capacity, a conservative investment portfolio will have a bigger 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, for example, Treasury bills and certificates of deposit.
Although a conservative investing strategy might protect against inflation, it may not earn significant returns over the long run when compared to additional aggressive strategies. Investors are often encouraged to turn to conservative investing as they close to retirement age paying little mind to individual risk tolerance.
Conservative Investing and Portfolio Strategies
Preservation of capital and current income are famous 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, for example, Treasury bills (T-bills) and certificates of deposit (CDs). A capital preservation strategy could be appropriate for a more established investor hoping to expand her current financial assets without significant risks.
A current income strategy can be appropriate for more seasoned investors with a lower risk tolerance, who are searching for a method for continuing to earn a steady flow of money post-retirement and without their standard salary. Current income strategies work to identify investments that pay better than expected distributions, for example, dividends and interest. Current income strategies, while relatively steady overall, can be remembered for a scope of allocation choices across the spectrum of risk. Strategies zeroed in on income could be appropriate for an investor interested in established entities that pay consistently (for example without risk of default or missing a dividend payment cutoff time, for example, [large-cap](/enormous cap) or blue chip equities.
Sometimes, investors who are otherwise more aggressive will temporarily adopt a conservative strategy assuming 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, intended to deliver protection first and modest growth second. After the market has adjusted, they might adopt a more offensive or aggressive strategy by and by.
Conservative investors can focus on inflation-adjusted investments, for example, 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 additional aggressive strategies, like a growth portfolio. For instance, a capital growth strategy tries to boost 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, for example, new technology companies, junk or below-investment-grade bonds, international equities in emerging markets, and derivatives.
As a general rule, 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 look for high returns by definition, the mixture still somewhat protects the investor against extreme losses. Investors who are know about the market and stock research can likewise make progress in a value investing portfolio heavy on stocks or even a latently invested exchange traded fund (ETF) portfolio blending stock and bond funds.
- Conservative investing prioritizes safeguarding the purchasing power of one's capital with the least amount of risk.
- One might adopt a conservative outlook in response to a shortening time horizon (counting more established age), the requirement for current income over growth, or a view that asset prices will decline.
- Conservative investment strategies will typically incorporate a relatively high weighting to low-risk securities, for example, Treasuries and other high-quality bonds, money markets, and cash equivalents.