Conservative Portfolio: Strategies for Stability

Key Points

• As you approach retirement or another major financial goal, you will want to scale back your investment strategy to focus on capital preservation and income rather than price appreciation. 
• Conservative investing focuses on preserving capital and minimizing risk by investing in low-volatility assets like government bonds, money market funds, and certain ETFs.
• By incorporating low-risk, stable assets, conservative investing aims to achieve steady, reliable returns while avoiding the stress of volatile market fluctuations.

While the allure of high returns from volatile assets like technology stocks can be tempting, many investors prefer a more stable strategy that allows them to minimize risk and preserve wealth over time. Conservative investment strategies are popular with those nearing retirement or saving for a significant financial milestone — or simply anyone preferring a lower-risk investment strategy. Low-volatility assets like government bonds, money market funds, and certain exchange-traded funds (ETFs) can help investors achieve steady, reliable returns while minimizing the stress of unpredictable market fluctuations often accompanying more aggressive investment strategies.

Read on to learn more about conservative investing and how implementing it can be a crucial component of your financial planning. 

Understanding Conservative Investing

Rather than seeking high returns, conservative investing focuses on preserving capital and minimizing risk by investing in low-volatility assets with some profit potential. The primary objective of conservative investing is to protect the initial investment’s value. As a result, most conservative strategies include assets like money market funds and municipal bonds. While these assets don’t show the same price potential as growth stocks, they have the ability to produce consistent, stable returns over time to keep up with inflation. 

Conservative investment strategies become more popular during periods of economic uncertainty. When the overall market is more volatile, investors work to move their capital to assets that are more likely to retain value. This further compounds overall market volatility and can result in a higher loss of value among growth stocks or other more volatile assets. 

Some key components of conservative investing include: 

• Low-Volatility Assets: More stable assets like government bonds, high-quality corporate bonds, and well-diversified ETFs limit the risk of price movements as much as possible. 
• Low Risk of Default: Unlike stocks, government bonds are backed by the government and offer a guaranteed return.
• Steady Income: Including dividend-paying stocks, bonds, or ETFs with a history of stable returns provides you with regular income while preserving the investment's value.
• Tax Advantages: Many low-volatility debt instruments, like municipal bonds, offer federal and often state tax exemptions on interest income, which helps reduce your tax burden.

Ultimately, your portfolio's ideal level of aggression will depend on your risk tolerance and risk appetite. If you’ve got less time to spend in the market because you’re approaching retirement or another financial milestone, it’s usually better to take a more risk-averse approach to ensure that a sudden market turn doesn’t jeopardize your financial goals. 

Conservative Investing Strategies 

To reduce overall portfolio volatility, you should incorporate assets that are more likely to retain their value — like these popular choices. 

Municipal Bonds

Municipal bonds are debt instruments issued by states, municipalities, and other government entities to finance public projects. Their function as a security is straightforward — it begins with a public project, like road construction or building schools, hospitals, or other essential infrastructure. To finance that project, investors purchase municipal bonds, which include a term and a date on which the investment will be returned (the maturation date). When the bond matures and reaches the end of the term, investors receive the initial deposit back with interest. As a general rule, bonds with longer terms also include more interest. 

Municipal bonds are backed by the government institution that issues them, meaning that these bonds have a very low chance of default. While they may not show as much growth potential as some other investment options, they provide a steady, reliable safeguard against major market movements.  

U.S. Treasury Securities 

While municipal bonds are used to fund more localized projects, Treasury Securities are used to finance projects and activities at the federal level. There are multiple types of securities currently being issued by the U.S. Treasury, including: 

• Treasury Bills: Short-term securities that mature in one year or less. T-Bills are sold at a discount to their face value and, as a result, do not pay periodic interest. Instead, you’ll receive the full value of the bill on the date of maturity. 
• Treasury Notes: Mid-term securities with maturities ranging from two to 10 years. T-Notes pay interest every six months and return the principal upon maturation. 
• Treasury Bonds: The longest-term security you can add to your portfolio, usually ranging between 20 and 30 years. Like T-Notes, T-Bonds pay interest every six months and return the full value of the bond when they mature. 
• Treasury Inflation-Protected Securities (TIPS): Federal securities designed to protect investors against the effects of inflation on purchasing power. The principal value of TIPS is adjusted based on changes in the Consumer Price Index (CPI), paying interest every six months based on the adjusted principal value. 

When you consider the overall conservative portfolio meaning and goals, it’s easy to see how Treasury securities can provide a valuable level of stability. Because the U.S. government backs these securities, they carry virtually no risk of default, making them one of the safest investments available — which is ideal if you’re looking to trade risk for reliability. 

Money Market Funds

Money market funds are a type of mutual fund that invests in short-term, highly-liquid assets issued by reputable entities. Common examples of assets that you’ll find in money market funds include Treasury bills, certificates of deposit, and major currencies. This focus on quality and short maturities minimizes the risk of default and interest rate changes, resulting in a low-risk, low-reward investment. 

The goal of money market funds is to provide investors with a safe and secure place to see small returns in exchange for higher liquidity. However, the trade-off is that these assets do not show long-term appreciation. While many investors use money market funds as a route of access to quick cash (like an emergency fund), this low level of risk translates to a lower potential for growth, which may not keep pace with inflation over the long term. As a result, while they are excellent for short-term needs, they are not ideal for long-term wealth accumulation.

ETFs

Exchange-traded funds (ETFs)  pool money together from multiple investors, using the capital to purchase a “basket” of assets. When you purchase shares of the fund, you gain exposure to each stock, bond, or other type of asset included in the fund. 

Note that not all ETFs are suitable for a conservative ETF portfolio — some ETFs are growth-oriented and may include higher percentages of volatile stocks. Some examples of conservative ETFs include: 

• Vanguard Total Bond Market ETF (NASDAQ: BND): This major bond ETF invests in more than 50 individual U.S. bond instruments. In August of 2024, the fund had more than $111 billion in total assets under management. 
• SPDR Portfolio Short Term Corporate Bond ETF (NYSE: SPSB): Providing a bit more income opportunity compared to BND, the SPSB invests in short-term investment-grade corporate bonds. While these bonds provide higher yields than government bonds, they still retain a conservative level of risk.
• iShares Select Dividend ETF (NASDAQ: DVY): This fund tracks the Dow Jones U.S. Select Dividend Index, incorporating a focus on high-yield assets. Stocks paying consistent dividends are usually more stable and provide consistent returns, making them suitable for more conservative portfolios. 

If you aren’t sure if an ETF will fit with a conservative portfolio, check out a few of the fund's top holdings. Generally, ETFs with more diversification and a higher concentration of bond investments tend to show less overall volatility. 

Retaining Value in a Volatile Market

Stabilizing your portfolio with a conservative investment strategy can help you preserve capital while also enjoying a lower level of risk. These portfolio allocation styles can be particularly beneficial as you approach retirement or another major financial goal — the fewer you plan to be in the market, the less risk you should usually take on. Controlling volatility in your portfolio begins with your asset selection; choose a diversified range of low-risk bonds, ETFs, and money market assets to spread potential risk between classes. 

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