How To Take A Conservative Investing Approach

To most people, becoming a conservative investor means picking the most risk-averse asset classes and investments. The goal of this practice is to guarantee that your principal investment – the money you initially invest in your portfolio – will be safe in the long run. However, by simply picking investments that appear to be conservative – for example, picking investments from typically “less risky” industries – some investors are likely to miss the mark on creating a truly conservative investment style. Instead, it is essential to not only understand what a conservative investment is, but to research all potential investments to make sure that they meet the necessary characteristics to qualify as conservative investments. For this reason, we have laid out a few of the most important qualifications of true conservative businesses below:

1. Low Cost of Production

This is a very important element of a business that can help to make a company low-risk. If a company can produce at a very low cost, it might mean that, even in a very bad year for the industry or the company itself, the business may still be able to make a profit. For investors, a business’ ability to make a profit is very telling for stock returns, as successful companies – or companies that generally turn profits – are more likely to continue to succeed into the future.

2. Strong Research and Marketing

Companies are less risky if they have the ability to stay up-to-date with recent trends. Thus, companies that are very good at research, development, and marketing will be lower risk because they will have the ability to transform along with consumer demand. Of course, if consumers like a company’s products and the company is being held in a favorable light in the news, that will reflect back onto investors.

3. Financial Skill

This qualification is fairly obvious, but companies strive to maximize their returns on their invested capital, as well as minimize their total costs. Thus, a company that understands its own financials and the industry that it operates in will be better able to turn profits and find business success, making it a generally less risky investment overall.

4. Strong Management Teams

The whole is equal to the sum of the parts. That means that if a company has strong managers who move to incentivize other workers, the company will likely demonstrate higher total quality. For this reason, it is typically believed that if companies that have strong management teams or cohesive employees, they are likely to carry less risk as potential investment opportunities.

5. Clear Advantage/Disadvantage Analysis

Finally, in determining if a company would make a good conservative investment, it might be wise for investors to conduct an overall analysis of the advantages and disadvantages that the company may come across in its industry. Consider elements such as competition, key resources, and primary skills that might differentiate the company from those around it. By going through this analysis, investors may be able to highlight important factors that might cause a company to be riskier in the future – which will indicate that the company is not the most conservative investment choice. However, if investors find few or no such characteristics, they will know that the investment creates a strong potential opportunity to add to their portfolios in the future.

Ultimately, by looking at these characteristics, it is important to realize that not all big businesses simply fit into the classification of being “conservative investments.” Further, after going through this analysis, investors might be better prepared to take on a truly conservative investment strategy if they so choose.