3 Things Every Conservative Investor Needs to Know

Conservative investing generally refers to the style of investing that prioritizes capital preservation above all else. And although this can be an effective approach, there are right and wrong ways to be conservative. In the following discussion, three of our experts shed some light on how you can make serious money by investing conservatively.

Matt Frankel
One unfortunate myth is that conservative investing means avoiding stocks altogether. Nothing could be further from the truth. In fact, conservative investors can produce incredible returns through the stock market while minimizing their vulnerability to market crashes and recessions.

Obviously, conservative investors shouldn't touch volatile growth stocks like Tesla and Amazon. Instead, they should construct well-diversified portfolios of high-quality stocks. Just for a few examples of what I mean by "high-quality stocks," here's a chart of some companies I would consider conservative investments. Pay special attention to these stocks' performance relative to the S&P 500 over the past 20 years.

Data from April 28, 1995 to April 28, 2015.

These stocks all have a few things in common. All have been around for a long time, all have tremendous brand recognition, and none of them has an excessive amount of debt on its balance sheet. These are companies that have the strength to make it through the tough times and produce market-beating performance over the long run.

With stocks like these, you can be a conservative investor and still produce fantastic investment returns over time.

Jordan Wathen
I'm a pretty conservative investor myself. I don't like putting faith in rosy projections about the future. When it comes to the companies I like to invest in, growth is just the icing on the cake.

For investors who think this way, there's a perfect investing "style" made easy by near-limitless fund choices: small-cap value investing. Over time, small-cap value stocks have outperformed all others, and they'll probably continue to do so. The reason is that growth stocks are frequently overpriced. Investors bake in aggressive assumptions about growth stocks' future into their valuations, and as a result, any deviation from the expected path ultimately results in a low return.

By contrast, small-cap value stocks have the advantage of being cheap (investors price in little to no growth) and being small (these businesses can actually grow meaningfully, based solely on their size). In addition, they offer the benefit of profiting from irrationality during booms: Small caps are frequently swallowed up by larger firms that go on high-priced acquisition sprees to keep up their lofty growth goals.

I should mention that small-cap value stocks have historically been more volatile than the S&P 500. They rise higher and tend to fall lower. But if, like me, you define "risk" as the potential for permanent loss of capital -- not the short-term gyrations of the market -- I think you'll find small-cap value funds to be a comfortable investment. Oftentimes, they simply have to beat worst-case expectations to deliver stellar returns.

Jason Hall
Conservative investing comes down to the ratio of risk and opportunity. In reality, almost all of the risk of stock investing is short-term in nature, while the opportunity lies in the historically high rate of returns, which has far outpaced bonds, savings accounts, and commodities like gold and silver over the past 50 years.

The most important thing you need to do is figure out your investing timeline and deploy your capital based on that.

For example, keep cash you'll need within the next few years in savings. You may not be getting much interest on it -- most savings are actually losing value to inflation today -- but that money won't lose 20% of its value right when you need it. On the other hand, when it comes to your retirement savings, you can't count on a regular savings account, which will actually shrink your money's spending power as the interest rate is outpaced by inflation.

Meanwhile, investments in the stock market are likely to beat inflation over time and reduce your risk of losses the longer you remain invested. If you build a portfolio of the kinds of companies that Matt and Jordan talked about, and then hold them for years and years, then the risk of short-term losses from market volatility will be greatly reduced.

By the same token, holding your money in overly conservative instruments like CDs and savings accounts may help you avoid the short-term volatility risk, but it exposes you to an even more dangerous risk over the long term: Loss of spending power when your returns don't exceed inflation.

Remember your time horizon and invest appropriately.