How To Build A Conservative Investment Portfolio
Posted on December 18, 2007 in the Bonds, Investing, Mutual Funds category
.This is in first in a series of posts where we will design and build investment portfolio’s based up different risk levels. The first one we will build is a conservative investment portfolio.
Typical Investor: The Conservative Portfolio is designed for income-oriented investors who are willing to accept only modest volatility and who seek only limited exposure to growth.
Portfolio Volatility: Low
Return Potential: Low
Asset Allocation:
- 25% Stocks
- 45% Fixed Income
- 30% Cash
Description: This kind of portfolio is designed to provide the investor with the income they need through the combination of cash and fixed income securities. The portfolio does offer some growth potential through conservative stock funds.
Fixed Income Component
The fixed income portfolio should be split between 50-50 between individual US Treasury bonds and bond funds. You can buy US Treasury bonds directly from the U.S Department of the Treasury or from any brokerage house.
Through the purchase of the individual US Treasury bonds, the individual bond funds should compliment this investment, not replicate it. These types of complimentary bond funds are Investment Grade Corporate Bonds and Government Backed Mortgage Securities Funds (GNMA’s).
Note that if you are in a high tax bracket that a municipal bond might be a better option than corporate or mortgage bond funds strictly from a tax saving perspective.
A conservative short-term bond that I like is the MassMutual Premier Short-Duration Bond Y (MSBYX). This bond fund has had a terrific record over the last three years and has not had a down year in the last 8 years. That is the kind of performance that I like from my fund managers!
Stocks Fund Component
Because of the conservative nature of this type of portfolio, the most appropriate stock funds are funds whose objective is growth with low levels of volatility.
Using the Yahoo fund screener, I used the following settings:
- Top 10% Performance
- Manager Tenure - 3 Years
- Four Stars Min (Morningstar)
- Above average return
- Below average risk
- Under $2,500 minimum, no-load and under 1% expense ratio
The fund screener recommended five funds:
- Fidelity Select Consumer Staples (FDFAX)
- Parnassus Equity Income (PRBLX)
- State Farm Growth (STFGX)
- Fidelity Small Cap Stock (FSLCX)
- Hartford Dividend & Growth HLS IA (HIADX)
These funds are listed in order of performance, and any combination of these funds will work well in your portfolio. When allocating your money amongst funds, I would not put more than 50% of your budget into any one fund.
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