Invest Like A Conservative

March 6, 2019 - John Osbon (3 mins to read)

When a recent new client signed on with Osbon Capital, he described himself as “a conservative investor.” Because that phrase can mean different things to different people, it was important to discuss what that meant to this individual. What is the goal of conservative investing? What does it look like in practice? What would a conservative investor invest in now? And so on. The discussion inspired me to tackle the topic for this week’s article.

Signs of conservatism

A conservative investor invests with the general awareness that family wealth is a finite resource that can take decades to accumulate. In the world of finite wealth, the priorities of a conservative investor are maintenance and preservation of family assets. The conservative investor’s mental checklist is informed by experience. Does the investment pass the common-sense test? Is the investment understandable? Is the investment liquid enough to sell in a reasonable timeframe at a fair price?

Two metrics that are important to conservative investors are cash flow and after-tax return. When investments produce consistent cash flow, it allows you to stay invested and be patient. Good after-tax return allows you to keep a high proportion of what you earn. These concepts sound simple but are difficult to achieve over long time periods unless you understand or have seen first hand how they work.

The conservative path forward

We encourage conservative investors to follow these rules:

Keep leverage low. Investing borrowed money can multiply gains, but can also turn a falling market into a family financial catastrophe. Warren Buffett has tightly monitored leverage for decades and most successful investors do it, too.

Keep a specific dollar amount of cash on hand – Having cash available eliminates the need to sell securities when everyone else wants to sell too. The appropriate cash amount depends on the family and we can help you figure it out.

Continue to invest for growth. This is a tough but necessary step. With growth investments, a portfolio has the opportunity to increase through the long ups and downs of the investment cycles. Without the growth element, a portfolio may feel safer and less volatile, but may be so “safe” that it doesn’t keep up with inflation and/or the family’s spending needs. Even conservative investors need to take some growth risk to act as a long-term engine for their family wealth.

Age and conservatism

The connection between age and conservative investing is often misunderstood. Yes, in many cases investors should ratchet down risk levels somewhat as they get older, especially if the individual stops working and must rely entirely on his or her portfolio to fund all spending. But for most families it is more complicated than that. Many people work beyond typical retirement age, and also want their investments to provide benefits for future generations.

Conservatives see investing as a very long-term process, with long-term discipline yielding long-term rewards. At age 70 there are still decades of investing ahead, with the investing baton eventually passing to other family members. Thus, an investment today can easily have a fifty-year impact on family wealth. An investment advisor can help define an age-appropriate, multi-generational conservative game plan.

Investing strategies may become more conservative with age. But there’s another variable that gets less attention. Investors tend to become more conservative as their investment accounts increase. At $5m or more it often makes sense to dial down the risk as conservation of assets takes on more importance.

The TEAM acronym

Conservative investing may seem simple as it avoids complex, exotic and speculative investment options. But following a conservative playbook to achieve the delicate balance between risk and return requires solid experience in all market conditions. As in most aspects of life, you achieve more with a team. The TEAM acronym spells it out, “together everyone achieves more.” If you would like to talk about the specific steps involved in investing conservatively, please give us a call.



Weekly Insights

delivered to your inbox


This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.

Weekly Articles by Osbon Capital Management: