The defining characteristics of conservative investors revolve around wealth preservation and risk aversion. Hence, based on this general preference, a conservative investment strategy involves selecting investment options or investing in securities, assets, and other investment vehicles that have low risk. This also means that knowing which investments have the lowest risk is essential for conservative investors to manage risks and maintain their purpose for investing.
Conservative Investment Portfolio: Best and Safest Investments for Conservative Investors
Note that the investment choices of conservative investors are in stark contrast with the choices of aggressive investors and are also considered safer than the choices of moderate investors. It is important for these investors to know which investments have the lowest risk to ensure that their investment portfolios are aligned with their risk profile and investment goals. The subsequent discussions list and describe the best and safest investment options for conservative investors.
1. Cash and Cash Equivalents
The safest investment options for conservative investors are cash and cash equivalents. This is due to the fact that they are highly liquid assets that can be readily converted into cash with minimal risk of loss. Furthermore, for investors whose purpose for investing centers on capital or wealth preservation, cash and cash equivalents are the safest and most ideal. The main downside of these investment options is that their low risk comes with very low returns. Below are specific details of cash and cash equivalents:
• Bank Savings Accounts: These are deposit accounts in commercial banks. They are highly liquid because funds are accessible via offline and online bank transactions. Note that cash in investment speak refers to the funds held in these savings accounts. A particular deposit account earns interest but can be subjected to withholding tax.
• Certificates of Deposit: Deposit accounts that offer fixed interest rates for a specific term are called certificates of deposit or time deposit accounts. The interest rates are higher than regular savings accounts but the funds are less liquid because they are locked in for a given period. These accounts are also called cash equivalents.
• Other Cash Equivalents: Other types of cash equivalents include Treasury bills or T-bills, commercial papers, and money market funds in pooled fund products like mutual funds, exchange-traded funds, and unit investment trusts. These are short-term and highly liquid investments that can be easily converted into cash with little risk of loss.
2. High-Quality Bonds
Bonds are less riskier than stocks. There are also types of bonds that are even less riskier than other bonds. These are called high-quality bonds. Specific examples include investment-grade corporate bonds and government bonds from established economies like U.S. Treasury bonds and Treasury Inflation-Protected Securities, and municipal bonds.
These aforementioned bonds are considered safe because of their performance and due to the fact that they are backed by stable bond issuers. This translates to minimal risk of default. High-quality bonds are ideal investment options for conservative investors building or expanding an income-generating conservative investment portfolio.
It is also worth noting that Treasury Inflation-Protected Securities provide conservative investors with protection from inflation. These are ideal for preserving capital because they provide a hedge against inflation. Municipal bonds are considered safe investments when issued by financially strong municipalities. They also provide tax benefits
3. Annuities
Several insurance companies offer financial products that provide a steady stream of guaranteed income. These are called annuities and they are considered one of the best investment options for conservative investors. An investor purchasing an annuity makes either a lump-sum payment or a series of payments to the insurance company. The insurance company then agrees to make periodic payments either for a specified period or throughout the lifetime of an investor.
Annuities are considered safe investments and suitable for conservative investors because they provide guaranteed income, protection against longevity risk, some principal protection, taxation deference, and some inflation protection. These financial products are ideal for individuals who want to invest for their retirement or want a guaranteed passive income stream. Take note that annuities come in different types and the most conservative are fixed annuities.
4. Investment-Linked Life Insurance
Life insurance products are generally not considered investments. However, in certain investment goals and objectives, they can still be considered as such, and they can be good investment options for conservative investors. The most notable type of life insurance that can be used for conservative investing is investment-linked life insurance. These are also called universal life insurance or variable universal life insurance products in other countries.
An investment-linked life insurance policy combines protection and investment. Unlike traditional life insurance policies, which provide a fixed sum assured in the event of death, accident, disability, or critical illness, this type of life insurance product offers the policyholder the opportunity to invest in various baskets of funds like stocks or equities, bonds or fixed-income securities, or mixed-asset portfolios. The investment aspect is similar to a pooled fund account.
The value of the investment component of an investment-linked life insurance fluctuates based on performance. The returns are both variable and used to fund various fees or charges. This makes it not ideal by default. The only reason it can be considered ideal for conservative investors is when the funds are invested in bonds or money markets, and when the purpose of the policy revolves around capital preservation and wealth creation for beneficiaries.
5. Specific Types of Stocks
Stocks or equities often come with higher risks than the aforementioned investment options for conservative investors. However, depending on the particular design of an investment portfolio and asset allocations, and in consideration of diversification, investing in stocks can be aligned with a conservative investment strategy. There are several types of stocks that tend to have lower risks than other stocks. Take note of the following:
• Defensive Stocks: These stocks are issued by companies that operate in defensive sectors and industries. Examples include pharmaceutical companies, utility providers, and producers of fast-moving consumer goods. These are called defensive stocks because, unlike cyclical stocks, the financial performance of companies and their stock prices tend to remain stable regardless if the economy is in the boost or bust phase.
• Blue-Chip Stocks: Shares of large-cap, well-known, and financially sound companies are called blue-chip stocks. Examples include tech companies like Apple and Microsoft, large holding companies like Berkshire Hathaway, and certain defensive companies like Procter & Gamble and Johnson & Johnson. Investing in these stocks often has lesser risks because of their dominant market position and competitive advantages.
• Dividend Stocks: There are stocks that pay regular dividends. Investing in them is ideal for conservative investors who want to maintain or build an income-generating portfolio. The best dividend-paying stocks come from companies that have dominant market positions, stable financial performance, are consistent in issuing dividends, and have demonstrated a consistent increase in dividends over time.
It is important to reiterate the fact that investing in stock is still riskier than investing in cash, cash equivalents, and high-quality bonds. A conservative investor must perform a thorough financial ratio analysis along with the other components of fundamental analysis to ascertain the risk profiles of prospected stocks. It is also imperative to limit the allocation of stocks and maintain a diversified portfolio to reduce the inherent risks of stock investing.