While investing in the stock market is never without risk, it doesn’t have to be a total gamble. Though many investors try to time the market in the hope of making big gains, this often doesn’t pan out like they would hope.
On the opposite end of the spectrum, Fulton Brock, president of Brock Asset Management, advises that a conservative approach to investing is actually the best option for most investors. Tactics such as using a diversified portfolio, focusing on long-term growth and avoiding high-risk stocks are just a few strategies employed by this approach, which offers very real benefits.
1. Achieve Steady Income
According to Brock, one of the most important benefits of a conservative investing strategy is that it enables investors to achieve a steady, dependable income based on the growth of their holdings.
“While exact amounts of returns are never guaranteed, a conservative approach with a diversified portfolio will generally deliver growth that outpaces the rate of inflation,” he explains. “For individuals in retirement in particular, this portfolio growth can serve as a valuable source of income. The peace of mind that can come from knowing your money is working for you and that it is consistently growing is well worth it.”
For example, from 1957 to Dec. 31, 2023, the S&P 500 delivered an average annualized return of 10.26%. While individual stocks obviously experience ups and downs far more extreme than this, a conservative investing approach is more likely to achieve these steady, reliable returns.
2. Reduce Volatility
Another key advantage of a conservative investing strategy is that it enables investors to reduce the volatility of their own portfolio. “We see just how volatile certain high-risk stocks can be,” Brock notes.
“The Dotcom bubble from the 1990s is a prime example of how high-risk investments in companies built mostly on hype can lead to a major market crash. Many of the companies involved didn’t even have a solidified product or business plan. When the market crashed, the companies disappeared entirely. A conservative approach requires doing a more thorough job of vetting investment opportunities to ensure you understand what you own — or what you’re considering investing in.”
It’s also worth noting that investors who put all their focus in high-risk stocks could ultimately be left with nothing if the bubble bursts. On the other hand, a diversified portfolio (a key component of a conservative strategy) lets investors ride out volatility in a particular sector or with a specific company.
3. Ability to Ride Out Downturns
Even with a diversified portfolio, no investor is completely immune to periods when the entire market faces a downturn. Periods of recession are relatively common, during which time many investors enter a panic and attempt to sell their holdings or stop investing.
Brock advises a different mindset.
“Part of the conservative approach to investing is that you’re going to consistently invest a set amount of money each month, regardless of what the market is doing. The idea is to take advantage of compounding growth. You’re not worried about current conditions. You’re consistently investing your money so it can start working and growing. In a sense, ignoring a market downturn in this regard will help you stay on track with your financial goals and avoid making emotional investing decisions.”
Consistency can be a powerful differentiating factor in the investing world. In fact, one analysis notes that from 1994 to 2023, 50% of the 50 best days for the S&P 500 occurred during a bear market, while an additional 28% occurred during the first two months of a bull market — periods when many would avoid investing due to market fears. Those who remained fully invested for all of the “best days” saw returns 54% greater than those who missed the 10 best days.
4. On Track For Long-Term Goals
Finally, the conservative approach to investing is generally considered the most reliable option to save for long-term financial goals. “A conservative approach doesn’t just help build retirement savings,” Brock explains.
“This can also be a valuable strategy when you’re trying to build an emergency fund, save for a car or a down payment on a house, or even pay for a wedding or a ‘once in a lifetime’ vacation. A conservative investment approach ensures that the money you need will be there when you need to use it. Reducing your exposure to market risk helps keep you on track for whatever you want to achieve with your money in the future.”
As long as investors invest in a way that their returns outpace the rate of inflation, they can set themselves up to turn these and other long-term money goals into reality. With a set strategy to guide their actions, investors can maintain the necessary discipline to stay focused on future goals, rather than get distracted by immediate worries.
A Safer Approach
While conservative investing strategies may not be as flashy or exciting as trying to time the market and chasing the latest hot company, there is no denying that for most people, a conservative approach is best.
By minimizing risk and developing a long-term investing outlook focused on your most important goals, conservative investing strategies put you on track for achieving the financial outcomes that matter most.
