| ||||||||||||
You don’t chase stock tips. You have no stomach for volatility. And you’re willing to trade upside potential for lower risk.
You are a conservative investor.
Identifying your investor profile — be it conservative, moderate, or aggressive — is an important step in helping you craft an asset allocation that aligns with your financial objectives, tolerance for risk, and time horizon to retirement.
Note that your portfolio preferences may straddle the line between two profiles as you assume either more or less risk depending on your goals. Your investor profile isn’t static either. It will likely change over time, in many cases becoming more conservative as you approach retirement.
“Understanding your investor profile or risk profile is crucial,” said Armando Sallavanti, a CERTIFIED FINANCIAL PLANNER™ with MassMutual Greater Philadelphia. “It’s the foundation of your financial strategy. Your risk profile dictates how much volatility you can stomach, which directly impacts your asset allocation. Think of it as knowing your speed limit before hitting the highway — it keeps you from driving too fast or too slow.”
With that, let’s look closer at what it means to be a conservative investor.
The goal of a conservative investor
The primary goal of a conservative investment strategy is income generation and capital preservation —or, preserving the savings you have. Generally speaking, that means minimizing exposure to volatility and risk.
But many conservative investors also seek some degree of capital appreciation, an often necessary concession for those who wish to preserve their purchasing power in the face of inflation.
A financial professional can provide personalized insights to help you determine if a lower-risk asset allocation might be right for you.
“I am a firm believer that there is no such thing as a one-size-fits-all investment strategy,” said Dan Drabinski, a financial professional with Bluecrest Wealth Management in Dallas, Texas. “Rather, the most appropriate investment style for you is the one which allows you to accomplish your goals without sacrificing additional risks.” (Related: Why a balanced asset allocation isn’t one and done)
Typical asset allocation for a conservative investment portfolio
A conservative investment portfolio can take many shapes. But in most cases, it will be weighted more heavily toward fixed-income securities that traditionally offer lower risk and lower returns than stocks. That said, all investments involve an element of risk and past performance is no guarantee of future returns. (Calculator: How much should I save for retirement?)
Fixed-income securities include:
- Treasurys — debt obligations issued by the U.S. Treasury and backed by the U.S. government.
- Investment-grade bond funds — funds that buy and sell bonds to create a steady income stream for investors.
- High-quality corporate bonds — bonds sold by larger companies with a lower risk of default.
Cash or cash equivalents may also play a prominent role in a conservative portfolio, including:
- Money market funds — mutual funds that invest in short-term debt securities with minimal credit risk.
- Certificates of deposit — savings accounts that pays a fixed interest rate on money held for a predetermined period of time.
The equities that a conservative investor does hold may be skewed toward large-capitalization stocks, dividend-paying stocks, or index funds that track a broad market index, such as the S&P 500 Index Large-cap stocks have historically provided more predictable cash flows and less price volatility than mid-cap or small-cap stocks. Although, here again, past performance is not indicative of future results.
Based on MassMutual’s independent research, a typical conservative investment portfolio might look like this:
Risk-averse investors who seek guaranteed returns that are not tied to stock market performance might also opt for a deferred fixed annuity. Payments into deferred annuities grow tax-deferred, and their value can be withdrawn or converted into a guaranteed income stream for a specific duration of years, or for life. (Related: Life insurance and annuity alternatives in investing)
That said, annuities are not necessarily the right solution for everyone. It’s always wise to consult a financial professional for guidance before making any major investment decision.
Past performance of a typical conservative investment portfolio
Your asset allocation will determine your rate of return.
According to data provided to MassMutual by market research firm Morningstar Direct, the average annual total return for Morningstar’s conservative asset allocation was 4.4 percent between 2003 and 2023.
During that time, the best-performing year (2009) was 19.26 percent and the worst-performing year (2008) saw a loss of 16.22 percent.
Note that Morningstar Direct’s conservative allocation data is based on the constituent U.S. mutual funds in that category. As such, the performance data may differ from the returns and losses that would be generated by MassMutual’s typical conservative asset allocation.
A well-diversified portfolio can potentially help reduce volatility by ensuring that a portion of your portfolio zigs while the other zags — regardless of market conditions. (Learn more: Understanding asset allocation and diversification)
“Diversification is key,” said Sallavanti. “Spread your investments across different asset classes to balance risk and reward.”
Which investors are most likely to be conservative?
In some cases, a conservative investment strategy might be appropriate for retirees and pre-retirees who seek a predictable income stream and no longer have the time horizon to ride out market downturns.
“As you approach retirement, the focus shifts to preserving capital and generating income,” said Sallavanti. “Conservative strategies, emphasizing bonds and dividend-paying stocks, or cash value from whole life insurance, can provide stability and reduce exposure to market swings.”
A lower-risk asset allocation might also make sense for more strategic investors who wish to reduce their stock exposure temporarily based on economic forecasts or market predications. (Although most financial professionals recommend that average investors not engage in market timing, in which they tweak their investments based on trends.)
“From a long-term perspective, it is much more appropriate to focus on building a diversified portfolio of well-performing assets that will provide negative correlation in down markets and allow for tax-efficient distribution in retirement,” said Drabinski. “Trying to chase specific returns is a fool’s game, which will lead to high turnover and higher taxes over time.” (Related: Why you can win with a steady investment strategy)
Lastly, investors of any age with a low risk tolerance and need for liquidity — those who can’t sleep at night when their assets exhibit volatility — might decide that a conservative asset allocation is right for them.
But keep in mind that loss aversion has risks of its own. By forfeiting their opportunity for growth, investors may miss out on the potential for gains and compounded growth that could fortify their retirement readiness. Also, retirees who earn less than the rate of inflation run the risk of outliving their savings.
“The old math regarding saving until age 65 for retirement so Social Security and a pension can take over has largely gone by the wayside,” said Drabinski. “These days, we are often planning for a healthy couple to have at least one party live until their 90s, and we need to ensure our money is working for us in order to keep up with inflation and distributions.”
Armed with insight about the core objectives, average returns, and potential volatility of a conservative investor profile, you may be positioned to make better choices about the type of investment strategy that might be right for you. But you need not go it alone. A trusted financial professional can offer valuable guidance that may help you reach your goals.
Discover more from MassMutual…
Understanding the basics of investing
________________________________________