Conservative Portfolio

When you think of the word conservative, you may think of its synonyms: timid, traditional and stable. Those words don’t necessarily scream a lot of return on your money. If you are young and have a lot of flexibility in your fast paced, jet setting life, a conservative portfolio probably doesn’t do much for you. Butas you get older, (unfortunately) your priorities change. It becomes a bigger risk to be investing your money in the fast paced, uncertain stocks that you did in your 20s and 30s. You want traditional, stable and timid when it comes to investing as you age.

Why do you want these three words to describe your portfolio? Simple, you want to build your portfolio to last. Conservative investors have a risk tolerance ranging from low to moderate. At this point in your life, you are not concerned about increasing the values of your investments. The main goal of having a conservative portfolio is to maintain real value and protect it from inflation rates. So, if you invest highly in bonds, you will create a high amount of current income. In these investments, you are concerned with their current stability and the return that you are getting from them.

How do you build a conservative portfolio that is low-cost and minimizes your risk? A conservative portfolio should meet these four criteria: plan for potential losses, set aside meaningful income to reduce the need to sell in a declining market, create a neutral or positive correlation to interest rates, and have realistic expectations about return. These factors will allow you to have sound investments with confidence and clarity.

Unlike in your 20s, 30s or even 40s and 50s, you do not have the luxury of starting over if you face hard times. By building your portfolio to last, it will give you high confidence that you will maintain stability with the time value of your money. So as your priorities shift, and your financial needs change, a conservative portfolio will keep confidence in your changing life.

Why take more risks than you need to? Ask yourself: what is the end goal of my portfolio? The answer should be pretty simple: to sustain my family through my retirement. It is important to understand the characteristics of your portfolio, and how those characteristics will compliment each other to accomplish your goals. How do you do this? Invest wisely. Conservative portfolios will consist of mainly cash or cash equivalents. So the best strategy is to hold about 20% in stocks and 80% in bonds and cash. It is always important to have a back up plan, just in case you face a bear market. If the stock market crashes, you should not lose everything. In the face of a bull market, you should get a nice return. Confidence is key, and a conservative portfolio will keep you confident in your investments.