Conservative Investing: What It Is, How It Works, And Its Pros And Cons

Conservative investing is a way to invest that focuses on businesses that are stable, predictable, and have lower risks. Most of the time, this strategy means buying blue-chip stocks and other low-risk investments. A conservative investment method also means slowly assembling a well-balanced portfolio over time. How numerous stocks you have in your portfolio will depend on how long you’ve invested and how much you know about them.

What is a Conservative Investment?

Conservative investing is a way to invest that puts more emphasis on keeping your capital than on growth or market returns. Conservative investing tries to protect the value of an investment portfolio by putting money into lower-risk securities like blue chip stocks, fixed-income securities, this same money market, and cash or cash equivalents.

In a conservative investment plan, more than half of a portfolio usually comprises debt securities and cash equivalents instead of stocks or other risky assets. You can compare conservative investing to investing in a risky way.

Keep your long-term, conservative investment goals in mind.

We think that as an investor, your goal should be to get a good return on your money over a long period. This is particularly true if you utilize a conservative strategy like the one we recommend. You are failing means making bad investments that don’t bring in much money or make you lose money.

Even investors who don’t do well can still make money. They don’t make enough to make up for the inevitable losses and still make a good profit. If you think you can never lose money if you profit, you might be tempted to part with your best investments when the market looks bad.

You might be able to sell just before a big drop in prices and then buy back at much lower prices. Most of the time, prices will soon reach their lowest point and rise to new highs. If you buy back, the prices will go up. If you had done this with Canadian bank stocks over the years, you might have missed out on some big gains.

In retrospect, it’s easy to see when the market went down. It’s much harder and nearly impossible to spot them ahead of time. After all, if you could always predict market downturns in advance, you could get a lot of the money in the world, but no one does that.

The problem is that you’ll predict a lot of downturns in the market that don’t happen. Usually, the clouds of a market downturn clear up quickly after investors who are afraid have sold. Even if you invest for the long term conservatively, there are times when it makes sense to sell. But “You’ll never go broke if you make a profit” is not one of them.

How to Understand Conservative Investing

Conservative investors can take on low to moderate levels of risk. Because of this, a conservative investment portfolio will have more low-risk, fixed-income investments and fewer high-quality stocks or funds. A conservative strategy means investing in the safest short-term instruments, like Treasury bills and certificates of deposit.

Even though a conservative strategy for investing might protect you from inflation, it might not earn as much over time as a more aggressive strategy. As people get closer to retirement age, they are often told to invest more conservatively, even if they like taking risks.

Conservative Investments and Portfolio Strategies

Many conservative investors focus on keeping their money and making money now. Capital preservation aims to keep the amount of capital at its current level and stop portfolio losses. A strategy for keeping capital safe includes safe short-term investments like Treasury bills (T-bills) and certificates of deposit (CDs).

A capital preservation strategy could benefit an older investor who wants to maximize her assets without taking too much risk. A current income strategy can be good for older investors with a lower risk tolerance who want to keep making steady money after they retire and don’t have their regular salary.

Current income strategies look for investments like dividends and interest, paying more than the average amount. Current income strategies are pretty stable but can be used in various allocation decisions across various risks.

Income-focused strategies could be good for an investor interested in large-cap or blue-chip stocks that pay consistently. Investors who are usually more risk-taking will sometimes switch to a more conservative strategy if they think the market will drop.

This could be because asset prices are too high or because there are signs of a recession. This move toward safer assets is named a defensive strategy, and it’s meant to provide protection first and then modest growth.

After the market has changed, they may change their strategy to one that is more offensive or aggressive. Conservative investors can protect low-risk, low-return investments from inflation by buying Treasury inflation-protected securities (TIPS) issued by the U.S. government.

Alternatives to investing conservatively

Like a growth portfolio, less risky strategies usually have lower returns than riskier ones. For example, a capital growth strategy tries to maximize capital growth or increase the value of a portfolio over the long term.

A portfolio like this could put money into high-risk small-cap stocks like new technology companies, low-quality bonds, international stocks in emerging markets, and derivatives. Usually, a portfolio for capital growth will have between 65 and 75% stocks, 20 to 25% fixed-income securities, and the rest in cash or money market securities.

Even though growth-oriented strategies are supposed to aim for high returns, the mix still helps protect the investor from big losses. Investors who know how the market works and how to research stocks can also do well with a portfolio mostly of value stocks or a portfolio of exchange-traded funds (ETFs) that includes both stock and bond funds.