Conservative investing is not immune to unpleasant surprises

Look at the master key at the bottom of your account statement and you will find information such as “Past performance is no guarantee of future results” and “You may lose some or all of your investment. Whether you own Tesla or the most sleepy dividend payers on the planet, they’re required by market regulators.

They are also true. No one can predict the future. We try to buy stocks that go up more than they fall, of course, but no stock that I know of has gone up all the time. If it did, it would keep growing until it gets bigger than the rest of the world economy, and that’s impossible.

It doesn’t mean we throw our hands up and roll the dice. Some stocks are much riskier than others. There are different ways to assess the risk of losing capital. Firms and even analysts within the same firm may draw different conclusions about a stock’s downside risk, although research departments generally keep their risk ratings consistent. Here are some reasons why a company may rate a stock as conservative.

The share price does not fluctuate more than the overall market. Analysts and portfolio managers call this “beta”. You can find the beta version in many stock quotes and research reports.

A stock that moves as much as the market will have a beta of one. If it is less than one, it has fallen less than the market during declines and increased less during bull markets. Not necessarily all the time or every day, but on average over several years. A beta of more than one means it’s choppier than the overall market. This is likely (but not a guarantee) to work in your favor when the market is up, and vice versa.

The company’s profits are predictable and financially sound. Some companies have reliable profit streams. Utilities have captive customers and limited competition. Their regulators set tariffs that allow them to profit from it. They have some interest rate risk, but their business moves very slowly.

Other businesses may not have as much stability as a utility, but they have enough cash and access to credit to deal with surprises. These companies will not only be able to hang on longer in difficult times, but they will also be able to acquire weaker competitors.

Write this part. Types of professors call this the “risk-return trade-off,” but you don’t need a capital market theory class to know that the higher a price can go, the lower it can go. There is no free ride. Conservative stocks may be safer (but not immune) from nasty surprises, but you should expect less of a return as the market has gone up over the very long term.

Even with less return, conservative stocks can make it easier to hold onto the market. Many investors will stay invested when a stock drops 5% than when it drops 15%. Staying long term allows money to do what it’s supposed to do: make more money through the magic of compounding.

Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a member of the Forbes Next-Gen Advisors list in 2018 and a finance professional at Avantax Investment ServicesSM. Evan leads a team of retirement transition strategists for clients who see themselves as the “millionaire next door”. He can be reached at 941-500-5122 or [email protected] Read more of his ideas at Securities offered by Avantax Investment ServicesSM, FINRA member, SIPC. Investment advisory services offered by Avantax Advisory ServicesSM, insurance services offered by an insurance agency affiliated with Avantax. 8225 Natures Way Suite 119, Lakewood Ranch, Florida 34202

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