When it comes to the market these days, you may be wondering if it is it better to stick with a conservative investing approach. After all, you are investing to gain money, not see your portfolio dwindle in value. While it can be frightening to see your investments take a turn for the worse, the only way to answer that question is to evaluate your personal investment goals. Are you investing for the long term, or are you planning on retiring in a few short years? Are you risk adverse, or is risking larger losses for a better rate of return acceptable to you? Finding the answers to these questions will give you a road map to determining how conservative your investment strategy should be.
The first factor which will decide how conservative you ought to be is, how quickly you will you need your money. If you have at least five years or more until you begin to live off of your investment proceeds, than having greater market exposure in your portfolio is acceptable. The rule of thumb is, never invest in the stock market unless you can leave the money in for at least five to ten years. The reason for this is, over the long run the stock market is fairly safe, averaging around a 9% annual return. However, on a year by year basis the market can drastically diverge from this average, as you probably know due to the last several years. If you sustain a 25% loss and then exit before you can make an offsetting gain, you are setting yourself up for a dire scenario. So, unless you can invest in the market for a half decade or more, than don't even consider stepping foot in the game.
If you know that you will need your money before this five year mark, then it is better for you to stick to a conservative plan. What types of investments can you hold in this approach? While the stock market is out, you will still have many solid options to choose from. The first of these is probably the most well known, with every investment firm offering some form of them. Bonds are the traditional counterpart to stocks, offering conservative returns that are usually guaranteed. While these can be a good option for retirees or those soon to be, there are some pitfalls to be aware of. If you hold them to maturity, you are guaranteed the original face value, plus the accrued interest. However, if you liquidate before this date, the prices are subject to fluctuations just as with stocks. Therefore, only invest in a bond that you are willing to hold for the full term.
Other conservative investment options include REITs, or Real Estate Investment Trusts. These are more nuanced, and you will need the guidance of a qualified financial planner if you decide to pursue them. Also, it is possible to invest in conglomerates that specialize in certain industries, like that of the healthcare field. Again, you will need professional guidance for this approach.
So, when it comes to evaluating how conservative your strategy should be, remember that the acceptable level of risk is directly related to the time of the investment. The more time you have for growth, the riskier the investments you can afford to hold. If you are nearing the income phase of investing, then you need much more stable instruments in your portfolio.