Conservative Stocks

• There was a time when blue-chip stocks, that is, the stocks of the very largest companies, were considered to be solid, conservative investments. They tended to pay a steady dividend, and the price was perceived to have a slow and steady upward trend. Academics disputed this approach to investing, and instead espoused modern portfolio theory. That theory used mathematical models to show why investors should not put their eggs all in one basket. Instead, the theory goes, investors need to hold a large number of stocks. To develop a conservative stock portfolio, you need to look at the big picture of your holdings, not just the individual companies. Purchasing stocks in a number of large banks alone is not going to create a conservative portfolio. Should the banking sector experience a crisis, your portfolio will be severely impacted. Diversification across different sectors is the way to spread out your risk.
  
  

Preferred Stock

• Building your own portfolio of conservative stocks involves looking at different industries. It also usually involves purchasing the stock of companies that have a solid track record of paying dividends. Some companies issue a special type of share, called a preferred share, that investors purchase specifically for the dividend. Preferred shares typically do not have the same price volatility as common shares. They tend to rise and fall more as interest rates rise and fall, because they are treated more like a bond than a stock. Preferred shares can be convertible into common stock. This means that you purchase them for the dividend, but if the stock does really well, you can convert the preferred shares to common stock.
  
  

Mutual Funds

• Rather than construct their own stock portfolios, many investors prefer to purchase a mutual fund and have their money managed professionally. Mutual funds are generally designed to provide a diversified portfolio of investments. Before recommending a mutual fund to you, a competent adviser will determine your investment objectives, time horizon and risk tolerance. A conservative mutual fund will usually include investments in bonds, as these tend to lower the fluctuations in the value of your investments.
  
  

The Mix of Stocks and Bonds

• One of the advantages of determining your risk profile is that you can determine how conservative you are. A mutual fund portfolio may have no stocks, and when you look at the past returns for such a portfolio, you may prefer to hold 50 percent of the portfolio in mutual funds that invest in stocks. Whatever mix you decide on, to keep your portfolio conservative you will need to determine how the portfolio is rebalanced. For example, say you decide to hold 50 percent in stocks and 50 percent in bonds. Stocks experience a boom, their prices rise and the value of your stock holdings becomes 60 percent of your holdings. You are now holding more stocks than you are comfortable with, so your portfolio needs to be rebalanced back to your original allocation. This is done by selling stocks and purchasing bonds until you are back at 50-50.