How to Make an Investment Portfolio More Conservative With Asset Allocation

Investors who want to approach their investments in a conservative way need to limit their exposure to risky financial securities, investing more heavily in traditionally safe securities and avoiding some of the more volatile investments, where the promise of returns may be higher but the risk is greater, too. While attempting to choose investments that will do better than average may be enticing, it can also cause steep losses for an investor. Focusing on conservative investments may not generate the highest profits in the financial markets, but it is more likely to protect an investor's capital.

Protecting Assets

Asset allocation is a plan that outlines the percentage of capital dedicated to each investment category. It is an approach that prevents an investor from focusing too heavily on a single asset class and, when properly designed, can protect a portfolio. For instance, as economic and market conditions change, financial securities respond differently to those circumstances. By investing assets in investment categories that are nonrelated or that have different trading patterns, an investor has a better chance of protecting a portfolio from a total loss.

Bonds

To achieve a conservative portfolio, investors should direct at least 50 percent of portfolio capital to bonds, according to Fidelity Investments. Nonetheless, during tumultuous economic times even bonds become riskier than usual. U.S. treasuries are government bonds and are generally deemed the most secure because there is little chance the government will default on its debts. Investing in corporate bonds is riskier -- especially those considered below investment grade, as these carry the highest risk for default. Investors can gauge the risk level tied to corporate bonds based on grades provided by bond rating agencies. Municipal bonds are generally safe, but may be at risk if the community issuing the bond falls upon hard times. Munis are also graded by bond rating agencies.

Risk

While some risk is necessary to produce returns in the financial markets, investors can mitigate that risk by limiting exposure to certain asset classes. Stocks can be risky because they are volatile investments, but some stocks are safer than others. Stocks that are leaders in their respective industries and that have achieved a track record provide some stability to an investment portfolio. Smaller stocks add risk because they often have less of a trading history, which can make it difficult for investors to gauge expectations. Alternative investments, including real estate and private equity, are among the most risky. A conservative investment portfolio should limit its exposure to alternative investment categories, according to investment bank Morgan Stanley.

Caution

Attempting to protect assets by directing them into cash -- such as in a savings accounts or certificates of deposit -- appears to be a safe investment choice, but it does not come without risk. Cash offers its own set of risks, not the least of which is inflation, which occurs when the value of a currency lessens over time. While dedicating some assets to cash may be beneficial because investors can then direct that money into the financial markets as conditions become attractive, it is not a replacement for investing. Diversifying exposure by investing across asset classes will avoid overexposure to any one investment category, and can produce the most conservative investment portfolio.