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Are You Really Conservative? -- 5 Reasons You Might Not Be

By  Mar 12, 2012

Topics: Finance & Investing

Many traders define themselves as conservative. But is this accurate? or does your trading style contradict the standards of "conservative" trading? Here are 5 ways to test how conservative you are in your trading and investing.

1. How do you investigate a company before you invest? Do you look at the long-term fundamental trend for key indicators, check annual statements and read current news about the company? Or do you actually invest on tips or advice without asking questions?

2. Do you know the business the company is in? This might seems obvious but it is not. Many self-defined conservative investors or traders know the names but really don't know what product or service the company sells. To be truly conservative, you should have a sense of the sector the company is in, and how strong that sector is today.

3. Where does this company stand compared to its competitors? Is the company the leader or a strong second? Or does it lag behind in terms of market share and profits? You want to find companies that compete successfully with other, similar companies. If you don't know, you are not investing in a conservative manner.

4. Has the company made a profit in recent years, and is the profit increasing each year? Why would you invest in a company whose revenues and earnings are leveled out or falling? or if the company is even losing money? A conservative principle includes a requirement of financial success.

5. What is the health of key indicators? Have you checked dividend yield, P/E range, or debt ratio? Is the dividend rising each year? Is the P/E consistently in a mid-range (often defined as between 10 and 25, for example)? Is the debt ratio level or falling, or is it growing each year? These are essential financial signals and true conservative strategies rely on them to choose companies as potential investments.

These five steps are necessary in order to qualify you as a true conservative investor. In fact, even conservatives should never settle for below-average returns on their investments. A very appealing definition of conservative is: strategies or a series of strategies designed to reduce risk while increasing income.

That is a goal worth setting and then putting into action.

Michael C. Thomsett (thomsett@conservativetrade.com) is an instructor with the New York Institute of Finance. He teaches five  courses: “Swing Trading with Options,” “The Amazing World of Options,” “Synthetic Options Strategies”, “Options timing and dividend income strategies,” and “Using candlestick reversal and continuation patterns to improve timing.”  He is also an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com.