The primary goal of investing? Building wealth. But with investing comes some risk, which can be so stressful for some investors that they choose to sit on the sidelines, too cautious to get started.
If that’s the case for you, you’re not alone. Sixty-five percent of adults say investing is scary and/or intimidating, with Gen Z (ages 18 to 23) and millennials (ages 24 to 37) more fearful than Baby Boomers.
But there’s good news for cautious investors: A conservative investment strategy can get you in the market while reducing the amount of risk you’re exposed to — limiting your number of sleepless nights.
Curious to learn more?
A conservative investment strategy…
… focuses on low-risk investments to make steady returns. With a conservative investment strategy, you don’t jump at the latest hot stock making headlines or a buzzworthy startup that just went public. Instead, by holding various asset classes, such as fixed-income securities (a.k.a. bonds) that distribute dividends or interest, large-cap stocks, mutual funds, and/or exchange-traded funds (ETFs), your portfolio can exhibit less volatility.
With a conservative investment strategy, you might invest in:
- Bonds, which in general are considered a low-risk investment. Municipal bonds — or bonds backed by the government and are sometimes referred to as “munis” — pay interest and are exempt from federal income tax and, in some cases, state and local taxes (leaving more money in your pocket).Once the bond matures, your initial investment is returned to you. And since it’s unlikely the government will default on its payment, your risk is lower than with other investments.For short-term conservative investors looking for the comfort of government-backed investments, Treasury bills (or T-bills) are another option. While some bonds don’t mature for 20 to 30 years, T-bills reach maturity in a year or less of being issued.Corporations also issue bonds. Since they’re backed by a business’s ability to make interest payments, they can carry more risk than munis and T-bills. (In exchange, they usually have higher payouts.) But they’re still considered a relatively low-risk investment option.
- Mutual funds and ETFs are also often part of a conservative investment strategy. That’s because both are diversified investments that pool money from many investors to purchase a collection of securities and/or other assets. Instead of buying shares of just one company, both mutual funds and ETFs allow you to own a portion of numerous businesses within a specific sector, an entire index, or even the entire stock market, which lowers your risk. More specifically, conservative mutual funds, which are sometimes referred to as conservative allocation funds, will generally contain a mixture of low- to mid-cap stocks and intermediate-term bonds.
- Defensive stocks, which provide stable earnings and a constant dividend. Its share price tends to remain stable, even if the market experiences a decline (or sudden upswing). Many large-cap stocks are considered defensive and when used as part of a conservative investment strategy, can help risk-adverse investors reduce their exposure to market volatility.
A conservative investment strategy is for…
… anyone, whether you’re new to investing or have been doing it for years.
If you’re a rookie, you can learn about investing while taking less risk. And if you’re more experienced, a conservative investment strategy could be smart if you’re nearing retirement age and have less time to ride out any potential downturns in the market.
You might also consider a conservative investment strategy if you want to invest the money you have set aside in your emergency fund. By investing it, the balance has the opportunity to earn a potentially higher rate than it would in a fixed-rate account (like a savings account or certificate of deposit), but will be less likely to experience significant losses.
A conservative investment strategy may be right for you…
… if it aligns with your risk tolerance, your investing goals, and your time horizon.
To determine your appetite for risk, ask yourself the following questions:
- How much uncertainty are you willing to withstand?
- What’s more important: safer, steadier returns or the potential for larger returns?
The average annualized return from the stock market is about 10 percent. If you’re attempting to beat that number, you should consider a more aggressive investment strategy consisting of higher-risk, higher-reward stocks. But you’ll need a high risk tolerance, since you could be required to weather market disruptions and the accompanying rollercoaster of emotions.
If you don’t have the stomach for the ups and downs that the stock market can experience, a conservative approach is probably your better option. Even if your returns come in below market average, you can still experience growth and the low level of risk can put your mind at ease. And you can’t put a price on peace of mind.
To build a conservative investment portfolio…
… you could go the D.I.Y. route and build your own self-directed trading account from scratch. But if you’d like to have professional management of your portfolio, a managed portfolio can provide a tailored, conservative approach that meets your low-risk appetite.
You could opt for an actively managed portfolio, which means investment experts are making decisions about your holdings based on their investing expertise and knowledge of trends with the hope of outperforming the market. In other words, your portfolio is actively monitored and managed for potential growth opportunities. But this is a strategy more often utilized by more aggressive investors.
For the more conservative investor such as yourself, you should consider a passively managed portfolio. With a passively managed portfolio, fund managers aim to follow a market benchmark or track a market index. (This is why it’s sometimes referred to as indexing.)
Our Managed Portfolio is a robo-advisor that combines human expertise with technology to maximize your investment opportunities while keeping your portfolio aligned to your risk tolerance and financial goals. We consistently monitor your portfolio and if something gets off-kilter, we’ll rebalance your asset allocation — keeping it in-line with your conservative approach.
Our cash-enhanced Managed Portfolio takes it a step further, giving you the ability to invest with even less risk. It has a high-yield cash position that acts as a buffer, so you remain invested regardless of any ups and downs in the stock market because you have the comfort that comes from earning interest on the cash held in the portfolio. And these portfolios are offered without any advisory fees, so you can make the most of the money you have to invest.
Investing can be emotional, especially for cautious investors. It always comes with risk, but knowing how to manage it can be crucial to financial success. A conservative approach can alleviate stress and reduce risk as you get set to grow your money.