Investment Tips for Conservative Investors

Dividend and conservative investors have two primary concerns: how to produce income and how to protect the value of their capital. Capital is best protected, at least in theory, in a money-market account. However such a strategy produces no income and barely keeps up with inflation. A better option is to buy stocks of high dividend payers which are unlikely to significantly erode principal and at the same time produce yields in excess of 4%.

When selecting an investment of that nature, its important to follow a strict and well-thought out strategy so as to avoid buying stocks where dividends evaporate or face large and permanent declines in stock price.

This article pointed out several thoughtful steps the conservative dividend seeking investor must consider when making investments.

“In "The Paradox of Choice: Why more is less", a popular book by Barry Schwartz, he explains how being faced with too many choices can actually be more of a hindrance than help. The risk is it can deviate from a well defined investment plan in order to chase the latest fad. A well defined investment plan which allows regular investment in a diversified range of assets will free you from the ‘tyranny of choice’ where the temptation is to chase the latest fad.”

The crux of any investment strategy is based on getting more in the future given what is available now. Several principles that are useful to the dividend-seeking investor from the article mentioned above are as follows:

Don't follow the latest fad - it often leads to the worst mistakes being made, for example your investment in technology stocks in 1999 rose close to 100% in a year, only to halve the following year.

In the long term, equities should produce the best returns. However, long term can indeed mean a long period as those who invested in Japanese equities found out after two decades of decline. Think long term. Too often we focus on short-term trends - for instance, the gold price moved up aggressively last year, but in the long term it has barely kept up with inflation. With the majority of South Africans likely to live well beyond the age of 80, our investment decisions should be informed by the fact that we need to provide for a lengthy retirement period. Increased longevity equates to longer holding periods which reduces the risk of holding equities. An expected horizon of over ten years should be sufficient to reduce the risk inherent of holding equities. But it is worth bearing in mind, that the valuation at the point of entry in equity markets, a lesson that investors who bought Japanese equities 20 years ago have learnt at a large personal cost.

Fear of losses can lead to poor decisions. As Warren Buffett famously said, one should be "greedy when others are fearful...and fearful when others are greedy". At the beginning of 2009, investors should have increased exposure to equities even while markets were plummeting.

Avoid "get rich quick" schemes. If it sounds too good to be true, it often is. Schemes that promise extraordinary returns, usually take one a huge amount of risk or are doing something illegal.

Inflation remains the hidden enemy of retirement savings. Fortunately, equities and inflation linked bonds are two instruments which provide useful hedges against it. Real equity returns have been resilient in the long term despite facing bouts of inflation while inflation linked bonds provide a predictable real return.

As Nobel prize winning Economist Paul Samuelson famously said about investments, "I tell people, investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas".