How Do Conservative Growth Strategies Really Work?

Conservative growth portfolios are designed to provide long-term income instead of short-term capital gains. This affects the types of investments the funds make. They are more likely to engage in purchasing constant-growth stocks instead of speculating on value stocks, and conservative funds rarely engage in shorting, derivatives or other riskier trading strategies. The goal is to consistently match or beat the market averages but only by a little. 

Constant-Growth Investing

Constant-growth stocks are those that have shown consistent, profitable returns for a few years or even a decade. These securities belong to established corporations, such as Google, Apple, Wal-Mart or Intel. Bonds also fall into constant growth investing in some cases. These securities, for the most part, can produce guaranteed long-term returns even if the short-term returns experience minor bumps. These securities are never a "good deal" per se, because many investors are turned on to their profitability, and they are likely to be priced accordingly or even priced highly. A mutual fund with conservative goals, though, is not as concerned with the pricing of a security as long as it promises stability in the long run.

Weighted-Index Investing

There are several indices that use weighting of securities to determine the most stable investments. Many of these indices, including the S&P 500, value constant-growth stocks using the efficient market hypothesis. This hypothesis assumes the prices of securities reflect the actual value of the securities since they are purchased by reasonable investors with access to competent information. Some conservative growth funds will focus on these weighted index options, either using them as a basis for investment or a basis for comparison. More aggressive funds will instead use the fundamentally weighted indices, which try to locate stocks that are underpriced based on complicated analyses. 

Passive Management

One key element of a conservative growth fund is passive management. This is a good thing for most investors. A passive manager is not likely to flip flop on goals and assets. This can create more stable growth; more importantly, it keeps fees due to transactions and asset reallocation low. A passively managed fund is poised to wait out dips in the market because of its highly diversified portfolio, spreading risks across multiple areas to minimize any large short-term losses. While managers do have to make decisions eventually, passive managers tend to err on the side of caution, preferring to make a decision too late than to make it too early.

Style Drifts and Abnormalities

There are times when you will notice the style of your conservative fund drifting away from its original focus. With a conservative fund, this drift is likely to be slow, steady and foreseeable. Most conservative growth funds are held for 20 plus years, so you should expect some drift over that period to compensate for emerging trends. You may find your fund holds a highly risky investment among a handful of cautious investments. The goal of this is to compensate for the abnormally low risk of something like a Treasury bond. Spreading risks means assuring there is a low-risk security for every high-risk security in your portfolio, not excluding all high-risk investments.

Conservative Investing

Conservative investing leads to long-term financial stability, but it is not designed to help investors make large profits. Conservative growth investors assume they can place a relatively large chunk of money away for a long period, typically 10 years or more. This allows them to buy into long financing schemes, such as long-term government bonds. They receive high, stable interest rates compared to those from short-term bond lenders. However, these investors do not have chances to turn a profit in a short time. As a result, conservative investment is best for long-term needs, such as saving for a college education or building up for retirement.

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