Exploring the Mindset of a Conservative Investor

If you want to hedge against market downturns, are concerned about the market taking a negative turn or want to preserve capital while staying ahead of inflation, a conservative investment strategy might be a good fit. The mindset of a conservative investor balances risks with long-term returns. Conservative investment strategies typically include a high weight of low-risk securities such as high-quality bonds, money markets and cash equivalents. What is a conservative investor? Read on to understand this investing mindset and when this strategy will make a difference for you.  

What is a Conservative Investor?

A conservative investor is anyone who chooses to invest with a low- or no-risk investing strategy. Some investors adopt a conservative outlook as they approach retirement age if they need to focus on preserving capital or if they suspect market downturns.

The most prominent conservative investors are those nearing retirement or already retired who are unwilling to accept significant volatility in their investment portfolios. At that stage, it isn’t worth risking the loss of their principal investment.

What is the Difference Between Conservative Investor vs. Aggressive Investor?

The difference between conservative investors vs. aggressive investors comes down to risk tolerance. An aggressive investor accepts more risk and can accept losing their investment capital for the possibility of higher returns. An aggressive investor is focused on short- or medium-term gains over the preservation of capital. This investment strategy is typically adopted by younger people who want to build wealth faster and whose income and age afford them the flexibility to accept the risk of losing some capital. 

A conservative investor has a lower risk tolerance and instead looks for investments with guaranteed returns or capital security. Conservative and aggressive are general terms encompassing a range of investment risk levels. Conservative investors range from low risk to moderate risk. Aggressive investors usually choose high or moderately high risk investment portfolios. 

10 Investments Typically Favored by Conservative Investors

As a conservative investor, these are some investments that you could consider.

1. Corporate Bonds

A bond is a type of debt obligation that is generally secure. With corporate bonds, you effectively lend money to a company for a set period of time until the bond matures. 

The bond is essentially an I-O-U stating that the company is committed to paying interest on the principal investment. In most cases, it is legally required to return the principal when the bond matures. For conservative investors, corporate bonds offer a low-risk solution to potentially earn higher interest rates. 

Research corporate bond offerings to ensure that the bond requires the return of the principal. Conservative investors may opt for bonds issued by financially stable companies with strong credit ratings. These bonds offer regular interest payments and return of principal at maturity.

2. Municipal or Government Bonds

Municipal or government bonds, also called munis, are issued by state and local governments to fund public projects. Like corporate bonds, you’re lending funds to the government for a specific duration at a set interest rate until the bond matures. However, municipal bonds are often considered less risky than corporate bonds.

Conservative investors choose munis because they are tax-exempt and low-risk. However, government bonds aren’t risk-free, as the issuer could fail to make interest payments or fail to repay the principal upon maturity. You can purchase munis at full-service, discount or online brokerage firms or through investment and commercial banks.

3. Dividend Stocks

Companies that consistently pay dividends can provide a regular income stream for conservative investors. Conservative investors consider dividend income from stocks for steady returns. Look for companies with a history of stable dividend payments and consistent growth returns. Examples of dividend-paying stocks include the personal care manufacturer Kimberly-Clark, the independent oil and gas company Pioneer Natural Resources and New York Community Bancorp. 

4. Blue Chip Stocks

Blue chip stocks are stocks issued by large, well-established and financially sound companies with excellent reputations. Conservative investors often favor investment in these companies with a long history of stable earnings and dividends as these stocks are generally less volatile than smaller company stocks. Examples of blue chip stocks include Alphabet, Amazon, Apple, Bank of America and Coca-Cola.

5. U.S. Treasury Securities

Considered one of the safest investments, U.S. Treasury bonds are backed by the government and offer a fixed interest rate, making them one of the most secure conservative investments to preserve capital. Also called Treasuries or Treasurys, the federal government issues these debt instruments to finance government spending. Interest earned on Treasury securities is taxable on the Federal level. 

Treasury securities are divided into three categories by the length of maturity. These are Treasury bills, Treasury bonds and Treasury notes. You can purchase Treasury securities directly from the U.S. government or through a bank or broker.

6. Index Funds

Index funds aim to replicate the performance of a specific stock market index, such as the S&P 500. They provide diversification and are passively managed, which reduces risk. Conservative investors may choose index funds as a passive diversification strategy that offers historically strong returns. An index mutual fund can offer conservative investors broad market exposure, low operating expenses and low portfolio turnover. However, they are not without risk, and the return of principal is not guaranteed.

7. Fixed Annuities

Fixed annuities are a type of insurance contract favored by conservative investors seeking a steady and predictable income stream. A fixed annuity is a contract between an individual and an insurance company. The individual makes a lump-sum payment or a series of payments to the insurance company, which guarantees a fixed rate of return on the invested amount. 

For investors, annuities may make sense because they often offer the safety of a guaranteed interest rate. Fixed annuities do not expose investors to market risk. Instead, the company assumes the investment risk and promises to pay a predetermined rate of return and protect the principal, regardless of market conditions.

In addition, annuities' earnings are tax-deferred, allowing the invested amount to grow tax-free until they are withdrawn.

8. Money Market Accounts

A money market account (MMA) is a type of savings account offered by banks and credit unions. MMAs combine the features of a traditional savings account with some characteristics of a money market fund. They typically offer a higher interest rate than regular savings accounts.

Money market funds invest in short-term, low-risk securities like Treasury bills and commercial paper. They aim to maintain a stable net asset value of $1 per share. Since MMAs are considered deposit accounts, they are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), up to $250,000 per owner, providing investors an additional layer of security.

Money market accounts offer fixed income, security, diversification of cash holdings and liquidity, making them ideal for short-term conservative savings goals. 

9. Certificates of Deposit (CDs)

Certificates of deposit (CDs) are time-based deposits with fixed interest rates and specified maturity dates offered by banks. They are FDIC-insured and provide a guaranteed return of principal plus interest. CD maturity dates range from 6 months to 10 years, with longer dates generally offering higher interest rates. Remember that you’ll face penalties and fees for withdrawing funds before the CD matures. 

10. Brokered CDs

Brokered CDs are time deposits offered by banks but are purchased and held through a brokerage account. They have fixed interest rates and maturity dates like traditional CDs. The CD is still offered by the bank and functions under the same principles of preservation of principal, maturity date and interest rates. However, brokered CDs are a more competitive market, so you can find brokered CDs with higher interest rates.  

Advantages of Being a Conservative Investor

Being a conservative investor offers important benefits and protection. Here's why you should consider a conservative investment strategy. 

Preservation of Capital

Most conservative investment strategies center on the preservation of capital. That means that even though you probably won't earn high interest rates, you shouldn't lose your principal. This feature can offer a cushion and security at retirement, although for many families, this is important at any age. 

Lower Risk

Conservative investments have lower risks than other investment classes, offering conservative investors increased peace of mind with better possibilities of preservation of principal. 

Income Generation

Conservative investments can offer interest rates to stay ahead of inflation and grow wealth over time. Unlike a bank account, conservative investment strategies do take on some risk and leverage that to increase income generation. 

Limitations of Being a Conservative Investor

The limitations of being a conservative investor are generally seen in long-term considerations. These include: 

Lower Potential Returns

Investors have to balance risk with returns. By choosing a lower-risk investment strategy, conservative investors generally sacrifice the possibility of higher returns, reducing total growth potential.  

Inflation Risk

When inflation rises rapidly, as seen in recent years, conservative investments might fail to outpace inflation. This effectively means that a conservative investor's portfolio could lose purchasing power or value in the marketplace. 

Opportunity Cost 

By focusing on conservative investments, investors may miss out on potentially higher returns from riskier asset classes or value stocks during periods of market expansion. This opportunity cost could reduce long-term portfolio growth.

Different Investing Styles

Investing styles can differ between investors because of risk profiles, investment goals and age. While some investors choose a conservative investment style long term, others choose conservative investing at specific times of high volatility or when they need to preserve capital. You can speak with a financial adviser and read more about how to start investing in stocks to build your own diversified, risk-balanced investing style. 

Frequently Asked Questions