Conservative Mutual Fund Portfolio Example
How to Identify, Find and Use Conservative Mutual Funds
Most investors have a basic understanding of what it means to be conservative but what exactly are conservative mutual funds and how do they invest? Who should invest in conservative mutual funds?
If you're a conservative investor, or think that you should be, you'll need to do a bit of homework to find out the best way to invest conservatively with mutual funds. You may also want to learn how to build your own conservative portfolio with a diverse selection of funds.
Conservative Mutual Funds Definition
Mutual funds that are conservative are commonly referred to as "conservative-allocation funds" because they have an allocation (mix of stocks, bonds and cash) that is relatively low in risk. Conservative portfolios usually seek to provide both capital appreciation and income to the investor. Conservative allocation funds tend to hold smaller amounts of stocks than moderate-allocation portfolios and are significantly lower in risk than aggressive fund portfolios.
Conservative allocations typically have between 20% and 50% of portfolio assets in stocks and 50% to 80% of assets in a combination of bonds and cash.
Who Should Invest in Conservative Mutual Funds?
A conservative portfolio is appropriate for an investor with a low risk tolerance and a time horizon from immediate to longer than 3 years. Conservative investors are not willing to accept periods of extreme market volatility (significant ups and downs in account value) and are seeking returns that match or slightly outpace inflation.
Sample Conservative Portfolio of Mutual Funds
Investors can build their own conservative portfolio of mutual funds with a balanced blend of various mutual fund types from different fund categories.
Here's an example of a conservative portfolio made up of five funds. The asset allocation is 25% stocks, 45% bonds and 30% cash (money market).
15% Large-cap stock (Index)
05% Small-cap stock
05% Foreign Stock
45% Intermediate-term Bond
30% Cash/Money Market
Best Conservative Allocations Funds
One of the best conservative allocation funds with a history of stable returns that have historically averaged above the rate of inflation is Vanguard Wellesley Income (VWINX). For example, one of the worst years for stocks was 2008, when the S&P 500 Index declined by 37%. VWINX had a loss of only 9.8%, which beats 90% of all conservative allocation mutual funds. The long-term returns (10 years or more) average nearly 7%. In different words, a patient investor who doesn't mind an occasional loss of around 10% in one year out of about 10 years, but still get average annualized returns significantly above the rate of inflation can consider VWINX.
If you want to build your own portfolio like Vanguard Wellesley Income, a smart way to do it is to buy index funds and allocate them in a similar way as VWINX. The asset allocation for Wellesley usually ranges around 35% stocks, 60% bonds and 5% cash.
Words of Wisdom on Conservative Investing
Before deciding to make your investment objective a conservative one, be sure to know your priorities. If your objective 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 moderate mix of mutual funds (i.e. 60% stocks, 35% bonds and 5% cash).
And if your priority is safety, and you don't mind earning near-zero interest, mutual funds are probably not the best choice.
But if you want to keep up with (or outperform) inflation with your investments, you'll need to take some degree of risk and be willing to see the infrequent but inevitable declines in value.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.