While the stock market can provide various benefits to investors, nothing is assured. In recent times, the United States has witnessed the Great Recession along with various fluctuations since then. When the economy or market is fluctuating, investors might think if their asset allocation of the portfolio is sensible for this scenario. There is one strategy that is often discussed for this economic scenario and that is known as the defensive investment strategy.
What Is A Defensive Investment Strategy?
A defensive investment strategy 2022 can help the investors to decrease losses of their investment. In investing terms, the aim of defensive investment strategy is to decrease the risk of losing capital while generating modern returns.
The strategy does exactly what the name suggests: defend. Instead of an offensive or aggressive strategy, which aims at profit and carries the potential for high risk, a defensive strategy aims on preserving the capital, while still continuing with modern growth.
Normally speaking, an investor who manages their portfolio with a defensive strategy would likely aim to diversify across regions and industries, make investments in blue chip stocks, purchase short maturity bonds, rebalance their portfolio on a regular basis, and also place stop loss orders. These are mainly designed to offer protection initially and then modest growth. The investor with this aims to benefit from the rising market by buying securities that are outperforming for an offered level of fluctuation and risk.
Defensive Investing Investments
Choosing investment in high quality short maturity bonds like Treasury notes and also blue chip stocks are great strategies for defensive investment. Even when choosing stocks, a defensive portfolio manager will be inclined towards large, established taglines that have fair track records. Presently, the portfolio manager is more likely to be inclined towards ETF (Exchange Traded Funds) that replicate the indices of the market as these provide exposure to all the established stocks in a single diversified investment.
A portfolio manager who practices a defensive investment strategy may also hold a mot of cash and cash equivalents like commercial papers and treasury bills which can allow to keep pace with inflation and safeguard portfolio in down market. However, keeping too much investment in cash and cash equivalents may raise questions as to why the investors are paying for active management in the primary place.
Defensive stocks are shares that offer stable earnings and consistent dividends regardless of the state of the complete stock market. There is a continuous demand for their products, so defensive stocks are generally more stable during the various periods of the business cycle. Defensive stocks are also less likely to encounter bankruptcy because of their relative strength during downturns. On the contrary, the low fluctuations of defensive stocks often leads to smaller profits at the time of bull markets and may lead to a cycle of mistiming the market.
Advantages And Disadvantages Of Defensive Investment Strategy
By now you have got an in depth knowledge on what is a defensive investment strategy and how it operates. So now let us have a look at some of its advantages and disadvantages that are indispensable to this investing strategy.
One of the advantages of defensive investing is conserving capital. Because investors aim at lower risk investments with this strategy, the conservation of capital is king.
This generally implies in the case of a market downturn, investors face less of a loss of capital. Along with that, some defensive stocks offer dividend income, which can help in the scenario of stock prices reduction.
Defensive investing can also offer confidence to investors who cannot handle a large loss of capital or who do not want to worry with each volatility of the market. For investors that depend on their portfolio for cash flow, defensive investing focuses to help earn a significant amount by not targeting highly fluctuations or risky stocks.
On the contrary, stability can arrive with a downside of fewer profits. In a steady market, a defensive strategy will often provide less of a return compared to a more aggressive strategy.
Another potential disadvantage is that a defensive strategy is not assured to safeguard an investor fully. When making an investment, there is always a risk that an investment will underperform.
A potential way to help discard the chances of losing money would be to put money in a savings account that is insured federally. The downside to that selection is that savings rates are generally below the rate of inflation.
Finally, a word of warning, at times shifting to a defensive strategy mid-market downturn is witnessed as too little, too late. If capital preservation is the main aim, this strategy is better employed as soon as possible, before a downturn, than during or after.
To start with, a defensive investment strategy seeks to decrease the risk of loss and also limit portfolio volatility. It is performed by investing in defensive assets. And also by building and maintaining a defensive investment portfolio.
Along with that, the types of defensive investments include:
- Cash and cash equivalents
- High-quality short-term & mid-term bonds
- Defensive stocks
- Productive real estate
- Defensive mutual funds and ETFs