Why You Need a Conservative Strategy

Should you have a conservative strategy? What if your goal is to build your portfolio, your money fast? In most cases the answer is ‘yes’ you should invest some of your money conservatively.

If you follow the principle of diversification, whether you are a conservative or aggressive investor there is always room for safe investing, for profitable investing that minimizes risk.

Talking about a conservative strategy doesn’t mean all your investments must be conservative. If you are diversifying your money with seven or eight stocks (or ETFs or mutual funds) then one of these can surely be a conservative investments. There are a number of ways to have a conservative investment, a strategy based on low risk yet incorporate the goal of profitable investing.

Three Types of Conservative Strategies

  1. Bonds
  2. High Dividend Stocks (or ETFs or funds)
  3. Basic ETF indexes

Bonds:

Create a group of 10 – 15 bond funds or ETFs, each slightly different from the other so you have choices from which to pick. For example, corporate bonds versus government; long-term versus short or mid-term.

With a group like this you can shift your money from one type to another depending upon the economy to take advantage of whichever type is producing the best return, paying the most interest.

The drawback to using bond mutual funds is that the fund families usually place restrictions that require you to hold the funds for 60 – 90 days to avoiding trading penalties. Bond ETFs trade like stocks and so have no trading restrictions.

The other caution with using bonds is to be sure not to duplicate. In other words don’t have a short-term government bond from Fidelity and from Vanguard because when analyzing and making buy-sell decisions you could end up just moving from one to another of the same type when you should be moving to a totally different type; i.e. going from short-term to long-term.

High Dividend Stocks (or ETFs or mutual funds)

Generally speaking stocks that pay high dividends are relatively stable while growing at a slow but steady rate. These stocks pay dividends (like getting interest on your money in a savings account) not only above the rate of inflation but at rates of 4 – 8% annually.

Again you can put together a watch group of these stocks. You can find them by searching the Standard & Poor® website, via Morningstar® or your broker’s website.

Remember that when investing in these type stocks you only reap the benefits of the dividend payouts if you hold them mid to long term. If you trade frequently you will miss out on getting the dividends unless you just luck out. If you invest in ETFs or mutual funds based on high-dividend stocks you have a better chance of reaping the interest payments.

Basic ETF indexes

You can create a small watch group of ETF indexes, just 3 – 5 ETFs to follow for safe profitable investing. Such a group will enable you to move from one conservative position to another. One group that I have used contains:

  • SPY – SST Spider 500 which emulates the S&P 500
  • IEF – iShares 7 – 10 Year Treasury Bond
  • MINT – PIMCO enhanced short maturity

I compare the performance of these against the S&P 500 itself to gauge which is doing best and where to put my money.

By using one of these type investments in your portfolio you can minimize risk and have a fallback strategy for when the markets go south and you want to move your other monies out of more aggressive strategies into a safer position until the markets start to surge again.

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