Conservative Assets: Navigating Market Volatility

The uncertainty of the stock market has people looking for a conservative way to invest and still yield returns. When talking about investing, it is hard to find a guaranteed, “conservative” investment. Conservative assets exist and we will discuss each one: cash, certificates of deposit, treasury bills, and money market funds.

A conservative asset is an asset in which the risk of loss is low.  Meaning, like cash, we have a relative certainty of the asset´s value. With the stock market´s daily troughs and peaks, conservative assets can make our portfolios feel more secure. Some of the most common conservative assets include:

Cash

Money is unarguably a conservative asset, in the short-term. I say short-term because due to inflation cash may lose its value in the long-term. Another rare moment when money may have  risk would if you ended up holding counterfeit currency. Though less common in the US, counterfeit riddles countries in central and South America. So, in general, holding our investments in cash, in the short term, is conservative.

Certificates of Deposit

A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination depending on the minimum investment requirements. A CD may restrict access to the funds until the maturity date of the investment. CDs are generally issued by commercial banks and are insured by the FDIC up to $250,000 per account registration. 

Money Market Funds

A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a Net Asset Value (NAV) of $1 per share. A money market fund portfolio is comprised of short-term, less than one year, securities representing high-quality, liquid debt and monetary instruments. There is no guarantee that the NAV will stay at $1 per share.

Treasury Bills

Treasury bills are another type of conservative investment. They are considered lower risk because they are backed by the U.S. Government. We can look at these as conservative assets because the likelihood of them defaulting is very low. If we hold a treasury bill to its maturity, we will receive the face value of the treasury bill. If we sell it early, the value may be more or less than we originally paid for it.  If interest rates go up, the value of the Treasury bill will go down.

So, in short, if we invest $100 in a treasury bill, upon maturity we will get $100 back (not factoring in time value of money). Treasury bills usually have maturity dates of up to one year.

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Conservative assets can make our portfolios feel low risk and guarded against the unknown, the low risk nature of conservative assets also means a smaller return compared to higher risk investments. Generally, the higher the risks, the higher the potential returns.

So, is there another approach to protecting our portfolios and increasing our returns?

Yes, and the answer is to diversify.

Rather than buying a group of conservative assets and watching their yield increase at the rate at which molasses drips from our spoons,  we can to some extent protect our portfolios by diversifying. 

Diversification means buying a diverse array of assets—both conservative and higher risk. By doing this, we can enjoy the potential higher yields of risky assets while also hedging the unavoidable market cycles with our more conservative assets.

Conservative assets are essentially lower-risk investments. To see higher returns, diversifying our portfolios to include both conservative assets and risky assets could prove to be more beneficial for our portfolios long term, than holding conservative assets alone.

The uncertainty of the stock market has people looking for a conservative way to invest and still yield returns. When talking about investing, it is hard to find a guaranteed, “conservative” investment. Conservative assets exist and we will discuss each one: cash, certificates of deposit, treasury bills, and money market funds.

A conservative asset is an asset in which the risk of loss is low.  Meaning, like cash, we have a relative certainty of the asset´s value. With the stock market´s daily troughs and peaks, conservative assets can make our portfolios feel more secure. Some of the most common conservative assets include:
Cash
Money is unarguably a conservative asset, in the short-term. I say short-term because due to inflation cash may lose its value in the long-term. Another rare moment when money may have  risk would if you ended up holding counterfeit currency. Though less common in the US, counterfeit riddles countries in central and South America. So, in general, holding our investments in cash, in the short term, is conservative.
Certificates of Deposit
A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination depending on the minimum investment requirements. A CD may restrict access to the funds until the maturity date of the investment. CDs are generally issued by commercial banks and are insured by the FDIC up to $250,000 per account registration. 
Money Market Funds
A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a Net Asset Value (NAV) of $1 per share. A money market fund portfolio is comprised of short-term, less than one year, securities representing high-quality, liquid debt and monetary instruments. There is no guarantee that the NAV will stay at $1 per share.
Treasury Bills
Treasury bills are another type of conservative investment. They are considered lower risk because they are backed by the U.S. Government. We can look at these as conservative assets because the likelihood of them defaulting is very low. If we hold a treasury bill to its maturity, we will receive the face value of the treasury bill. If we sell it early, the value may be more or less than we originally paid for it.  If interest rates go up, the value of the Treasury bill will go down.
So, in short, if we invest $100 in a treasury bill, upon maturity we will y get $100 back (not factoring in time value of money). Treasury bills usually have maturity dates of up to one year.
……….
Conservative assets can make our portfolios feel low risk and guarded against the unknown, the low risk nature of conservative assets also means a smaller return compared to higher risk investments. Generally, the higher the risks, the higher the potential returns.
 
So, is there another approach to protecting our portfolios and increasing our returns?
Yes, and the answer is to diversify.
 
Rather than buying a group of conservative assets and watching their yield increase at the rate at which molasses drips from our spoons,  we can to some extent protect our portfolios by diversifying. 
Diversification means buying a diverse array of assets—both conservative and higher risk. By doing this, we can enjoy the potential higher yields of risky assets while also hedging the unavoidable market cycles with our more conservative assets.
 
Conservative assets are essentially lower-risk investments. To see higher returns, diversifying our portfolios to include both conservative assets and risky assets could prove to be more beneficial for our portfolios long term, than holding conservative assets alone