There are many types of risks that can keep a worrywart investor up at night: default risk, principal risk and longevity risk.
But conservative investors can employ risk-reduction strategies to curtail these investing perils while growing and preserving their capital.
Someone who can’t tolerate losses in their investments is typically considered a conservative investor. The degree ranges from those who panic and sell when the market drops to retirees who are living off their portfolio, stretching their money to last their lifetime.
To test risk tolerance, investors can assess their personal stress levels and behavior from the S&P 500 market drop of 6.2 percent in 2018. Conservative investors panicked and lost sleep over their finances last year as the market fell.
Although there isn’t a 100 percent worry-free conservative investment portfolio, there are a few strategies to minimize investing risk:
— Minimize stock market exposure.
— Consider U.S. Treasurys.
— Invest in the stock market early.
— Build a portfolio with a mix of investments.
— Take an active approach.
[Read Manage Your Portfolio Like a Pro: Create Your Own Robo Advisor.]
Minimize Stock Market Exposure
Bob Bacarella, chairman and portfolio manager of Monetta Financial Services, says: “No investment strategy can guarantee positive returns, and it’s nearly impossible to tell if the market is in a temporary dip or at the beginning of a prolonged correction. Risk and volatility go hand in hand.”
Investors seeking a worry-less portfolio will minimize stock market exposure. But that strategy could protect one’s principal while jeopardizing an investor’s ability to meet long-term financial goals, Bacarella says.
Consider U.S. Treasurys
If investors take a capital protection approach, they could buy Treasury inflation-protected securities, known as TIPS, and Treasury bonds. These government securities increase along with inflation. But while maintaining purchasing power, Treasurys won’t increase investors’ wealth in the same way that investing long term in stocks or real estate markets does.
[10 Ways to Maximize Your Retirement Investments.]
Invest in the Stock Market Early
Christopher Carosa, author of “From Cradle to Retirement: The Child IRA” in New York calls worry-free investing a trap.
Caros claims, “Younger investors can’t afford worry-free portfolios.” He reiterates the common wisdom that investing in the stock market early and allowing those dollars to compound is the best way to gain financial security. And financial security is the goal of worry-less investing.
So investors who want to meet their long-term financial goals must take a certain amount of risk, or they’ll be left short of funds later in life.
The paradox of worry-less investing is that an investor must invest in riskier assets in order to grow wealth, while tolerating a certain degree of volatility.
Build a Portfolio With a Mix of Investments
Rick Ferri, CEO of Core-4 Investing in Texas, believes that investing in simple low-fee portfolios is an optimal strategy. To meet financial goals, keep fund and adviser fees low and choose several index exchange-traded funds.
Ferri says investors receive enough diversification from a mix of stocks, bonds, real estate investment trusts and cash assets.
Ferri’s Total Economy Core-4 Conservative Growth portfolio allocates 28 percent to a total global stock market index fund, 8 percent to a U.S. small-cap value index fund, 4 percent to a U.S. REIT and 60 percent to a total U.S. investment-grade bond index fund.
The higher allocation to bonds makes this conservative portfolio suitable for investors wary of the ups and downs of stock prices.
For investors with a penchant for real estate investing, this asset class is a defensive play for investors worried about the stock markets, says Gary Beasley, CEO and co-founder of Roofstock in Oakland, California.
[Read: Will Active Management Make a Comeback?]
Experts say access to real estate investing, for investment diversification has exploded from REITs to real estate crowdfunding platforms, such as Fundrise and RealtyMogul.com.
Take an Active Approach
Steven Jon Kaplan, CEO of True Contrarian Investments in New York City takes a more active approach to conservative investing. Kaplan evaluates securities that are on sale and selling for less than the true value, as measured by the price-earnings ratio. This conservative valuation investing approach assumes that the percentage invested in the stock market should be driven by the stock market’s P/E ratio and historical patterns, not a specific asset allocation.
To minimize risk, Kaplan evaluates stocks with P/E ratios below 9 for investment consideration.
Investing outside of traditional stocks and bonds can also support a conservative investment portfolio, experts say.
Another way is from income-producing agriculture, a real asset with little correlation to the stock market, says Austin Maness, chief operating officer at Fort Worth-based Harvest Returns. With passive income and a hedge against inflation, investors can widen their investment assets and soften the blow of volatile financial markets, he says.
High-net-worth investors may also consider buying municipal bonds or funds, says Jim Grandinetti, head of portfolio management at Gurtin Municipal Bond Management in Solana Beach, California.
For example, an average A-rated, 10-year municipal bond yields 2.7 percent. Assuming a 24 percent marginal federal tax rate and 9 percent state tax rate, the tax equivalent yield is 3.9 percent. If the bond is held to maturity, investors can be assured of a nearly 4 percent return.
Understanding the components of a worry-less portfolio investing are fraught with ups and downs. By understanding the nature of financial markets, maintaining a cash cushion for emergencies and the first few years of retirement, investors can comfortably grow their net worth with investing. For the extremely risk sensitive, greater amounts of cash assets and fixed investments will temper stock markets wild swings.
Ultimately, even conservative investors need a portion of their investments in the stock market to grow their wealth for the future.
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5 Ways to Build a Conservative Investor’s Portfolio originally appeared on usnews.com
