Should you have a conservative strategy?
Is your goal is to build your portfolio and accumulate wealth fast? In most cases, I would also suggest you invest some of your money conservatively. If you follow the principles of diversification, whether you are a conservative or an aggressive investor there is always room for safe, profitable investing that minimizes risk.
Considering 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 bunds) then one of these can surely be conservative in nature. There are a number of ways to have a conservative investment, a strategy based on low risk, yet still incorporate you goal of profitable investing.
Three types of Conservative Strategies
High Dividend Stocks ( or ETFs or Mutual Funds)
Create a group of 10 – 15 bonds or ETFs, each slightly different from the other so that you have choices from which to pick e.g., 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 on the economy, and take advantage of whichever type is producing the best return or pay the most interest at the time.
The drawback to using bond mutual funds is that the fund families usually have restrictions that require you to hold the funds 60-90 days to avoiding trading penalties. Bond ETFs trade like stocks and have no trading restrictions.
The other caution with using bonds is to be sure that you don’t duplicate. In other words don’t have a short-term government bond from Fidelity and another from Vanguard because when you’re analyzing and making buy/sell decisions you might end up just moving back and forth between the two when you should be moving to a totally different type: e.g., 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 because they grow at a slow but steady rate. These stocks pay dividends (like getting interest from your money in a savings account) that are not only above the rate of inflation but often pay annual rates of 4% – 8%. 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 types of 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 dividends unless you just happen to luck out. If you invest in ETFs or mutual funds based on high-dividend stocks you’ll have a better chance of reaping the interest payments.
BASIC ETF INDEXES
You can create a small 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 Bonds
MINT – PIMCO enhanced short maturity
I compare the performance of these against the S&P 500 to gauge which is doing best and so determine where to put my money.
By using one of these types of investments in your portfolio you can minimize risk and have a fallback strategy for when the markets go south. That way it’s easier to move your monies out of more aggressive strategies and into safer positions until the markets start to surge up again.
Raymond M.F. Dominick is the author of “Invest Safely and Profitably” (Your Success Guide), available from Amazon.