Conservative Approach to Investing

The Conservative Approach to Investing

Conservative Approach to InvestingConservative:  According to Investopedia: conservative investing is an investing strategy that seeks to preserve an investment portfolio’s value by investing in lower risk securities such as fixed-income and money market securities, and often blue-chip or large-cap equities.

There are many definitions for conservative investing.  We believe all definitions must include efforts intended to preserve and or protect principal.  However it’s never that simple.  Does preserve and protect mean your goal is to:

·        Never lose money….

·        Never lose money but make sure to include inflation…..

·        Never lose money but make sure you make a higher than cash return when the market (S&P 500) is positive.   This is very hard to do with interest rates so low…….

The answer(s) will depend on when an investor is considering the options.  By way of example:  If in the last quarter the market return was 5% then a conservative investor may look at that and decide with interest rates close to zero they want the opportunity to earn a higher return and take some risk.   Another example:  The investor may be at a time in their life where they do not want to worry, no matter what.  So they’re willing to accept a low to zero return.

It’s not easy to decide because over time the money will lose purchasing power and if it’s not invested with some growth in mind, the investor may be disappointed a few years down the road.

Here are some things to consider:

·        Cash – with yields close to zero, as of 5/6/2016 – SNVXX Schwab .01, or $10 per year for every $10,000 and if held in an investment account may actually be negative due to fees.

·        Short Term Bonds – (2 Yr. Treasury Bonds) as of 5/6/2016 – Yield .76 or $76 per year for every $10,000 invested or $152 for the two years.  The actual yield may be less after transaction costs.

·        Long Term Bonds – (10 Yr. Treasury Bond) as of 5/6/ 2016 – Yield 1.75 or $175 for every $10,000 or $1,750 over the ten year period.  The actual yield may be less after transaction costs.

·        Annuities – these vary by company and type.  Usually an investor purchasing an annuity wants a guarantee and is prepared to invest for a long period of time and understands that they will have limited distribution choices.   Annuities can have high internal fees, have various restrictions on withdrawals and the funds are usually tied up for a long period.  Savers can sometimes get regular monthly income but pay for it with high internal fee charges.  As a fiduciary CTMA does not market annuities as we believe there are better alternatives.

·        Large capitalization stocks such as telecommunications and utilities, etc… are considered less volatile and often less risky than smaller capitalization, non-dividend paying securities.  They can help you build a steady stream of dividend income, however they are not without risk – mostly associated with the overall market – but can help with an allocation for the conservative investor.

What’s an investor to do?  Be certain to look at your whole picture.  What is your most important goal?  Do you need liquidity or cash for a large purchase?  If you position your assets in a conservative way, will they meet your long-term lifestyle needs?  Most importantly, take your time and allow your plan to work.  Second guessing usually prevents the investor, you, from meeting your goals.


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