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

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 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
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 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
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 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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