A conservative investor is someone who wants his money to grow but does not want to risk his principle investment. Conservative investors choose financial products that do not fluctuate much in value, such as conservative mutual funds. This is a wise investment strategy when the investment money is needed soon or when the economy is in the midst of a major downturn. However, conservative investors miss out on explosive growth during times of economic prosperity.
TL;DR (Too Long; Didn't Read)
Conservative investors focus on building portfolios with safer investments that are unlikely to see large value fluctuations.
Types of Conservative Investments
While the best portfolio for an aggressive investor could have riskier stocks from brand new companies, many blue chip stocks can appeal to a conservative investor. These are usually large, established companies with a long record of paying steady dividends. Their share prices do not fluctuate as much as more aggressive stocks do.
However, stocks in general tend to be riskier than other types of investments. This is why conservative investors tend to gravitate toward bonds. The share price of bond funds are much steadier and have a somewhat predictable rate of return. Even more conservative types of investments are certificates of deposit and money market funds. They pose virtually no risk to the principle.
Considerations in Portfolio Building
A conservative investor must also consider the amount of money she could make if she added a little more risk to her investment portfolio. The primary goal of conservative investors is to preserve the investment principle. The trade off for that is a relatively low return on the investment. If this falls below the rate of inflation, the conservative investor's money is essentially losing value.
Placing a small portion of a portfolio in more aggressive investments is a wise way for conservative investors to raise their total rate of return while maintaining a relatively high amount of security for their money.
Features and Goals of a Conservative Investor
Conservative investors tend to be older people who will need the bulk of their investment money soon to finance their retirement. Most conservative investors have a sizable investment portfolio from a lifetime of working and investing. A major market downturn can wipe out someone's life savings if it is all in high-risk investments.
As investors get closer to retirement age, they usually shift larger and larger portions of their portfolio into conservative investments. This protects their money from unexpected economic turbulence and ensures that their money will be there when they need it.
Many younger people can also be conservative investors. This often happens when they are saving money for a major purchase like a house or college education. In these instances, the investment philosophy is the same as that of retirees.
As the younger investor gets closer to the date that the money will be needed, he shifts his assets into conservative investments. This ensures that there will be money to buy the house or pay for the college education when the time arrives.
Time Frame for Investment
There are mutual funds that automatically adjust investment portfolios from aggressive to conservative investments over time. These are called date-targeted mutual funds. The investor chooses one based on when she will need the money, for example, the year she plans to retire or the year her child begins college.
When there are many years until that date, the date-targeted mutual fund will invest in aggressive financial products in an attempt to increase value. As the target date approaches, they automatically shift portions of the mutual fund into conservative investments.
- Investopedia: Conservative Investing
- BusinessDictionary: Conservative Investing
- American Century Investments: One Choice® Portfolio: Very Conservative - AONIX
- American Association of Individual Investors. "AAII Asset Allocation Models." Accessed April 29, 2020.
- Vanguard. "Vanguard Wellesley Income Investor Shares." Accessed April 29, 2020.
- Vanguard. "See the Difference Low Cost Funds can Make." Accessed April 29, 2020.
Kent Ninomiya is a veteran journalist with over 23 years experience as a television news anchor, reporter and managing editor. He traveled to more than 100 countries on all seven continents, including Antarctica. Ninomiya holds a Bachelor of Arts in social sciences with emphasis in history, political science and mass communications from the University of California at Berkeley.