Introduction
Conservative investment funds are considered low-risk funds that aim to match or exceed the average inflation rate. These funds are best suited for investors with a low risk tolerance or those who are nearing retirement or are currently retired.
Definition of Conservative Investment Funds
Conservative funds are often referred to as “conservative allocation funds” because they contain a relatively low-risk allocation (a mix of stocks, bonds, and cash). Conservative portfolios typically seek to provide capital growth and income for the investor.
Conservative allocation funds tend to contain less stock compared to moderate allocation portfolios and are much lower in risk compared to aggressive investment fund portfolios. Conservative allocations usually consist of a range of 20% to 50% of the portfolio’s assets in stocks and between 50% and 80% of the assets in a mix of bonds and cash.
Who Should Invest in Conservative Investment Funds?
Conservative portfolios are suitable for investors with a low-risk tolerance and a time frame ranging from immediate to more than 3 years. Conservative investors are not willing to accept periods of severe market volatility (sharp ups and downs in account value) and seek to achieve returns that match or slightly exceed inflation.
Example of a Conservative Mutual Fund Portfolio
Investors can build their own conservative portfolio from mutual funds with a balanced allocation of various types of funds from different categories.
Here is an example of a conservative portfolio made up of five funds. The asset allocation is 25% in stocks, 45% in bonds, and 30% in cash (money market).
– 15% in large-cap stocks (index)
– 05% in small-cap stocks
– 05% in foreign stocks
– 50% in intermediate-term bonds
– 25% in cash/money market
Best Conservative Allocation Funds
One of the best conservative allocation funds with a history of stable returns that have historically surpassed the inflation rate is the Vanguard Wellesley Income Fund (VWINX). For example, one of the worst years for stocks was 2008, when the S&P 500 index fell by 38.49%. The loss for VWINX was only 9.8%, outperforming most conservative allocation funds.
By November 2020, the long-term (10-year) returns were 7.8%. In other words, a patient investor who does not mind experiencing intermittent losses of around 10% in any one year out of about 10 years, while still receiving average annual returns that far exceed the inflation rate, may consider VWINX.
If you wish to build your own portfolio similar to the Vanguard Wellesley Income, the smart way to do this is by purchasing index funds and allocating them in a manner similar to VWINX. The asset allocation for Wellesley typically hovers around 35% in stocks, 60% in bonds, and 5% in cash.
Conclusion on Conservative Investing
Before deciding to pursue a conservative investment strategy, be sure to understand your priorities. If your goal is to grow your money over time, you may need to increase your exposure to stocks and invest in a moderate allocation fund or create a balanced mix of mutual funds (such as 60% in stocks, 35% in bonds, and 5% in cash).
If your priority is to maintain guaranteed capital with no market risk, and you do not mind earning near-zero interest, then investment funds may not be the best choice for your investment method. However, if you wish to keep up with (or exceed) inflation with your investments and do not mind taking on low levels of market risk, conservative investment funds and allocations can be a wise option.
Disclaimer
Responsibility: The information on this website is provided for discussion purposes only and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
Source: https://www.thebalancemoney.com/conservative-mutual-fund-portfolio-example-2466527
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