Opposite to aggressive investors are the conservative investors. Their risk tolerance is even lower than that of moderate investors. These people do not find high-risk and high-reward investing appealing. Their perspective is built on a foundation of caution and prudence. A thorough understanding of the characteristics of a conservative investor fleshes out how a conservative approach to investing differs from aggressive and moderate investing.
The Cautious Investor: Key Characteristics of a Conservative Investor
A conservative investor prioritizes financial security and stability above all else. Risk aversion is his or her defining characteristic. Most investors with a conservative risk profile also do not aspire to generate a substantial amount of wealth. Their main focus is wealth preservation. These are the reasons why their decisions and choices are polar opposites from the decisions and choices of aggressive investors. The subsequent discussions enumerate and describe the key characteristics of a conservative investor based on psychological traits, financial characteristics, and investment behavior.
Behavioral Mindset
Caution is central to the mind frame of a conservative investor. Some also lean toward simplicity because complex concepts tend to be associated with higher risks. Most have extreme levels of patience and find quick gains unappealing. The following are the notable psychological traits of a conservative investor:
• Skeptical and Cautious: Most conservative investors are skeptical and cautious. These are rooted in their desire to protect their funds or capital. They are often dubious about new investment opportunities, market trends, and financial advice.
• Prefers Simplicity: Another defining characteristic of a conservative investor is that he or she prefers simplicity and is often dismissive of complex or complicated concepts. Most also prefer choices that are easier to understand and manage.
• Favors Peace of Mind: These investors also put a high premium on peace of mind. This explains their strong aversion to risks or potential losses and conservative outlook. Their prospects or expectations are grounded on proof and reality.
• Security-Oriented: Most of these investors also factor in security in their decisions. A particular conservative investor often chooses options that provide stability. His or her decisions will always be based on assurance or guarantees.
Financial Position
The financial characteristics of conservative investors are in stark contrast with the defining financial position of an aggressive investor. They either have limited funds to invest or have low commitment to invest. Some have a lot of cash and prefer maintaining their liquidity. Take note of the following:
• Limited Income: Most people with low income are often conservative investors. They have limited funds to invest. Some have limited income-generation potential due to personal circumstances. Their priorities often center on securing necessities.
• High Liquidity: Some high-income investors with a conservative mindset are often more liquid than aggressive investors. They believe that cash is king. This is evidenced by their substantial cash deposits relative to their non-cash assets.
• Old-Aged Adults: Another notable characteristic of a conservative investor is his or her age which is often close to retirement or is already in his or her retirement years. There is no use for this investor to lock his or her cash in less liquid investments.
• Post Accumulation: There are investors who are in the later stage of wealth accumulation. Their focus is on eventual liquidation or wealth distribution. These individuals often take a conservative approach to investing to ensure wealth preservation.
Investment Preferences
Conservative investors are more focused on wealth preservation. Growth is often an afterthought. Their choices center on low-risk investments. Investments with higher liquidity or lower liquidity risks and lower to negligible volatility are also preferred. Below are the investment preferences of a conservative investor:
• Wealth Preservation: A defining characteristic of a conservative investor is that his or her investment preferences are based on capital or wealth preservation. This is true regardless if he or she has limited income or has accumulated wealth.
• Low-Risk Investments: This investor also focuses on low-risk investments like bonds, certificates of deposit, and money market funds. Some might invest in stocks but they will choose to invest in established large-cap and value stocks.
• Fixed-Income Portfolio: A conservative investor has a portfolio characterized by a larger allocation in bonds and other fixed-income securities or income-generating instruments like income funds from different pooled fund products.
• Passive Management: This investor also prefers low-maintenance investments. Most also do not routinely rebalance their portfolios or trade assets and securities. Almost all conservatives prefer passive investing over active investing.