Invest Like A Conservative

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.



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