16: Conservative Investing

I am on the phone with people from my accredited investor group a lot getting to know them and I often hear the term “conservative investing” thrown around a lot.

I’m always curious what investors thinks is conservative. Presumably, conservative means safe so that gives me a sense for what people consider low risk.

Particularly for those people who have not been listeners of mine for long, they often say that they have a certain amount of money they just want to be conservative with–it’s the money in their retirement accounts invested in the equity markets–stocks, bonds, and mutual funds.

Can someone tell me why owning stocks, bonds, and mutual funds is “conservative”? Didn’t most of us live through the dotcom bubble and the great recession of 2008? What was so conservative about losing half of your portfolio for no apparent reason?

What makes you think it won’t happen again? During a recent federal reserve meeting, Janet Yellen referred to the current stock market valuations as “rich”. I’m guessing that refers to the fact that while corporate earnings have not really improved over the past 3 years, the Dow Jones Industrial is up about 25 percent.

Just before the dotcom crash in the late 90s, federal reserve president Alan Greenspan famously expressed concern over stock valuations as well: he called it “irrational exuberance”.

Now some of you are going to say–“Buck, you’ve been saying this for a year now. Look at how the markets keep on going up!.” You’re right but it doesn’t make sense. If it doesn’t make sense, I want no part in it.

In 2008, single family home values were skyrocketing and people with no money and no credit suddenly were buying multiple homes. That didn’t make sense either even though, at the time, it may have appeared that not getting in on some of the action was a lost opportunity.

But let me put things into perspective for you–we are amidst the third longest economic expansion in history and the most sluggish. The Dow is at record highs and over-valued. We are due for a recession and a market correction.

It’s not a matter of if–it’s a matter of when and you have NO CONTROL over when it happens.

It is my opinion, therefore, that leaving your money exposed to the equity markets at this point in time is anything but conservative!

Buck