Generally, conservative investors feel that
safeguarding what they have is their top priority. More formally,
this approach is called
capital
preservation.
These investors want to avoid risk —
particularly the risk of losing any
principal
— even if that means they’ll have to settle for very
modest returns.
Playing it safe
Conservative investors allocate most of their
portfolios to bonds, such as Treasury notes or high-rated municipal
bonds, and cash equivalents, such as CDs and money market accounts.
They’re generally reluctant to invest in stocks, which may
lose value, especially over the short term. When conservative
investors do venture into stocks they‘re often inclined to
choose blue chips or other large-cap stocks with well-known brands
because they tend to change value more slowly than other types
of stock and sometimes pay
dividend
income. Conservative investors usually have to settle for modest
investment growth, which might make it difficult to meet long-term
goals, such as having enough income during retirement.
But in some situations a conservative investing
approach may be appropriate. For instance, if you have major financial
responsibilities, such as large amounts of money invested in your
own business, or you’re responsible for the care of an ailing
or elderly relative, it might make sense to take on less risk
in your investment portfolio. And if you’re retired or expect
to retire in the near future, it may be unwise to put a lot of
your assets at risk in volatile securities, such as stocks, at
this stage in the game, when your portfolio may not have time
to recover from a market downturn.
