Conservative Investing Explained

By Nina Semczuk · March 23, 2023 · 6 minute read

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Conservative Investing Explained

In the investing world, there are a number of different strategies for investors to choose from, and some are considered less risky than others. One of the strategies, often familiar to those nearing retirement, is conservative investing.

Often consisting of blue-chip companies, high-dividend stocks, bonds, low-risk fixed income investments, and additional less risky investments, conservative investing portfolios aim to produce returns that protect capital and outpace inflation. In other words, conservative investments pursue stability and protection from market fluctuations, instead of the larger returns that aggressive investing strategies target.

Conservative vs Aggressive Investments

The opposite of conservative investing — which is sometimes also known as defensive investing — is aggressive investing. While conservative investing focuses on protecting capital and producing income in some cases, aggressive investing aims to earn the highest returns. For some investors, that means a growth-focused investment portfolio, which could consist of investments that have a higher risk but a higher potential for reward (i.e., high returns).

Whether an investor chooses a conservative or aggressive path and how they build an investment portfolio depends on a number of factors. In general, conservative investing is more popular among those nearing retirement or who are on a fixed income. Aggressive investing is more commonly recommended to those who are younger and have years of earning power left, and those who are more risk tolerant.

When Do Conservative Investments Make Sense?

Investors who want to protect their capital and don’t mind the tradeoff of potentially lower returns are a natural fit for conservative investing.

This could describe an investor who has a mortgage or other debt who can’t withstand a large loss. Or it could be an individual who’s nearing retirement, or another circumstance that results in relying on a fixed income, who can’t afford to chase returns. Conservative investing also aligns with those who wish to attempt to stabilize their investments during a time of economic distress or market turbulence.

All that said, investment strategies should be tailored to the individual investor. While there are certain supposed rules of thumb, such as investing aggressively when younger and being conservative when near retirement, the appropriate strategy depends on an individual’s financial goals and objectives.

For instance, at any age, an investor may have a lower risk tolerance than someone with the same finances, thanks to personal investing beliefs or other differences. Another consideration is time horizon.

We’ll break down risk tolerance and time horizon and how they relate to conservative investing in the next two sections.

Risk Tolerance

In investing parlance, risk tolerance refers to the amount of risk investors are willing to take with their investments. In other words, it’s how comfortable investors are with losing money.

Investors with high risk tolerance generally invest more aggressively, which often means a portfolio consisting of a high percentage of stocks. The higher the percentage of stocks as opposed to more stable investments, like bonds, ups the risk because of the volatility associated with the stock market.

An individual’s risk tolerance is personal, and it’s determined based on financial factors as well as emotional factors. Someone who’d prefer capital protection and would rather not follow the markets anxiously with every fluctuation likely has a lower risk tolerance.

Financial circumstances play into risk tolerance, too. If an investor is not a high-income earner and has debt, such as a mortgage and student loans, it might mean they have a lower risk tolerance.

In general, there are three levels of risk tolerance: conservative, moderate, and aggressive.

•   Conservative risk tolerance focuses on protecting capital with the understanding that lower returns are likely.

•   Moderate risk tolerance balances risk with reward, seeking to earn returns while protecting capital, but less strongly than a conservative investor’s approach.

•   Aggressive risk tolerance seeks to maximize returns, but that goal can entail large losses as well.

Time Horizon

Time horizon refers to the number of months, years, or decades an individual will need to invest in order to achieve their financial goals. For many, that financial goal is reaching a certain amount for retirement. Other possibilities could include funding education accounts or trusts for offspring or saving a certain amount for a second home.

Conservative investing comes into play when aligning financial goals and time horizons. For example, investors who have reached the end of their time horizon for funding a certain goal could switch from an aggressive strategy to a more conservative strategy.

Another example: If investors have a short time horizon, they may not be able to withstand market volatility, so they might be advised to invest more conservatively.

To try to hit financial goals, it might be useful to estimate how much money can grow using the power of compound interest. The SEC has a calculator for number crunching and planning.

The Retirement Estimator , offered by the Social Security Administration, is an interactive tool that allows the user to compare different retirement options.

If you’re wondering when you can retire, it all starts with deciding at what age you want to retire and how that decision affects your finances. The retirement savings formula goes like this: Start with current income, subtract estimated Social Security benefits, and divide by 0.04. That’s the target number in today’s dollars.

What Are the Most Conservative Investments?

Let’s explore what conservative investments could look like. For starters, cash and cash equivalents, such as certificates of deposit, money market accounts, and high-yield savings accounts, are often considered some of the most conservative investments. They are usually insured by the federal government up to a certain amount and have a lower interest rate than other investments.

Bonds, especially U.S. Treasury bonds, bills, and notes, are also considered conservative. Treasury bills mature between four and 52 weeks, notes can stretch to 10 years, and bonds mature at 30 years. The Federal Reserve controls the interest rates, and generally, an investor won’t lose money on these investments unless a negative-yielding bond is bought.

Corporations also issue bonds; investors can invest by buying bonds or purchasing funds that invest in corporate funds. Bonds from reputable, large companies are often considered less risky than those from small companies.

While bonds and cash equivalents are considered more conservative than stocks, certain types of stocks can tilt toward the conservative side, such as blue-chip stocks. Blue-chip stocks are usually shares from more conservative, stable, well-established companies.

Conservative stocks can also mean stocks within a certain sector that’s known for being more defensive. This could include utilities and basic needs companies, such as waste management and healthcare. High-dividend stocks are also considered conservative investments.

Investing First Steps

Conservative investing is an investment approach that focuses more on protecting capital and, in some cases, producing income. This is in contrast to aggressive investing, which aims to earn the highest returns even if that carries a higher level of risk. Whether conservative investing or a more aggressive approach make sense for your portfolio depends on a number of factors, including your risk tolerance and time horizon.

Regardless of whether you decide to invest conservatively, the first step to take in your investing journey is opening an investment account. One option available is SoFi Invest. With SoFi Invest, investors can choose from a variety of investments and get started with just $1.

Those who prefer specialized help in building a portfolio, rather than the DIY approach, can take advantage of SoFi’s automated investing option. Becoming a SoFi member comes with benefits like free access to career coaches and member experiences. Members also can speak with a financial advisor for no extra charge.

Start investing with just $1.

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