Conservative Investing

Conservative investing is an investing strategy that seeks to preserve 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.

Conservative investors have risk tolerances ranging from low to moderate. Those who have a low risk tolerance are often less comfortable with the stock market and might wish to avoid it entirely. However, although a conservative investing strategy may protect against inflation, it will not earn significant value over time.

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. Losses sustained could put her retirement at risk.

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.

Coca-Cola, Disney, PepsiCo, Wal-Mart, General Electric, IBM, and McDonald’s are examples of blue chip companies. They are multinational firms that have been in operation for a number of years. They dominate their respective industries and have built highly reputable brands over the years, surviving multiple economic downturns.

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.

Both of these strategies sit below 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.