What Is Conservative Asset Allocation?

Mary McMahon

Conservative asset allocation is a low-risk distribution of assets in an investment portfolio. This contrasts with moderate and aggressive strategies, where investors take on more risks for the potential of larger rewards. As people grow older and the time to retirement shortens, it can be advisable to transition investment styles. Using a conservative approach ensures that funds will be available for retirement, without the risk of losing a chunk of the portfolio in a poor market. Aggressive strategies can be more suitable for young investors who have time to recover if something goes wrong.

Woman holding a book
Woman holding a book

Mixtures of stocks, bonds, and cash can be used in conservative asset allocation. Cash can be made to work for the owner by being held in a certificate of deposit or other interest-bearing investment backed by a financial institution. Even in a poor market, the locked-in interest rate will yield earnings, and the principal will still be retained. In addition, the investor can consider a balanced mix of stocks and bonds to round out the asset mix.

Some stocks are riskier than others. Those known for dependable, reliable performance tend to be good investments in a conservative asset allocation. They may not generate big earnings because of their low volatility, but they also have a lower risk of poor returns. Diversification is also important, to ensure that people are not overinvested in a single particular sector or type of stock. Someone with primarily tech stocks, for example, is vulnerable to problems in the tech industry.

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Low-risk bonds for conservative asset allocation can include government securities as well as those issued by reliable and reputable companies. These generate a lower yield, but it is much more dependable. For investors who will be retiring in 10 years or less, this can be an important consideration. Ideally they should have a strong principal balance in their investment portfolios already, so there isn’t an urgent need for big investment earnings. The conservative asset allocation helps the investor keep pace with inflation without being exposed to unnecessary risk.

Some investors prefer to manage their own assets. Others may work with an adviser or a broker to make selections. It can help to map out an investment plan at the start to determine when to transition between different approaches. Someone who wants to retire at 65, for example, might plan to get more moderate around age 45, and conservative at 55. An established plan can help investors avoid temptations that might be risky.

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