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Conservative investing used to mean you were protected to some extent from the kind of financial market volatility we’ve seen in 2022.

Now, investors who shun risk are getting the worst of it. Depending on what funds or individual securities they hold, it’s possible they could be down more on a year-to-date basis than more aggressive investors.

A quick example: The iShares Core Growth ETF Portfolio (XGRO-T) was down 5 per cent for the year through March 21, while the iShares Core Conservative Balanced ETF Portfolio (XCNS-T) was down 5.9 per cent. XGRO is a diversified portfolio with an aggressive 80-20 mix of stocks and bonds, while XCNS has a 40-60 split.

The other day, I heard from a pair of concerned conservative investors within a few minutes of each other. One holds the Vanguard Retirement Income Portfolio (VRIF-T), which aims to deliver income yielding roughly 4 per cent with a 50-50 mix of stocks and bonds, and the other owns the RBC Select Very Conservative Portfolio, a mutual fund with a 30-66 mix (and about 4 per cent in cash). The RBC fund was down 3.9 per cent for the first two months of the year, while VRIF was down 4.9 per cent.

Both investors saw their bond-heavy funds as offering stability. Instead, they’re looking at upsetting price declines. What gives? Stocks have been choppy this year – Canadian markets are up a little, U.S. markets are down. But the bigger story is the bond market, which has fallen by more than 7 per cent this year if you measure it using the FTSE Canada Universe Bond Index. Markets are bracing for a significant uptick in interest rates, and that means falling prices for bonds.

You can mitigate the weakness in bonds by holding short-term bonds or bond funds – short term means a maturity of five years or less. The FTSE Canada Short Term Overall Bond Index was down only 2.6 per cent for the year through March 21. Holding guaranteed investment certificates can help as well – they don’t trade on a daily basis and thus won’t inflict losses on your portfolio.

But we may also need a rethink of conservative investing for at least the near term. Investors must either bear the risk of bonds falling further, or move money into a stock market that has been on a tear since March, 2020, and will at some point in the future hit a wall.

Conservative dividend stocks are far riskier than bonds, but you can count on getting your dividend income and be confident that any price declines ahead will be more than offset over the long term. That said, the stock market as a whole will always have more downside than bonds.

Interest rates will peak at some point in the next 12 months or more, and then bonds will reverse course. Until then, conservative investors need to figure where they stand on risk.

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Follow Rob Carrick on Twitter: @rcarrickOpens in a new window

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