“When you talk about conservative investments, it is important to note whose definition you are using. Who inserted the word ‘conservative’ into the investment? One can come across something with a formal name that says ‘conservative’ that is not as conservative as perhaps a naive investor might think. There is potential for being misled, or misleading one’s self, by focusing on the word.”
He points out that mortgage-backed securities were considered conservative investments — at least until the financial mayhem of 2008 proved otherwise.
There is also the belief bonds are safer than stocks, and that fixed-income funds always mitigate risk.
“But that conservative fund may very well hold junk bonds, making it far less safe than one might initially assume,” he says.
Investors may also be disheartened to learn that some funds pitched as conservative may be dabbling in derivatives to inflate performance.
Sometimes managers simply “make mistakes” and end up with “exposures they didn’t intend,” Bar-Or says. But there are also situations where a fund may not be performing well and managers “battling to get back to even may purposely inject more risk.”