Definition of the defensive investment strategy
What is a defensive investment strategy?
A defensive investment strategy is a conservative method of allocation and portfolio management aimed at minimizing the risk of losing capital.
Key points to remember
- Defensive investing strategies are designed to offer protection first and modest growth second.
- Many portfolio managers adopt defensive investment strategies for risk-averse clients, such as retirees without a stable salary.
- Typical investments in a defensive strategy include high-quality, short-term bonds (such as treasury bills) and blue-chip or defensive stocks.
Understand the defensive investment strategy
A defensive investment strategy involves regular rebalancing of the portfolio to maintain an expected asset allocation. It also involves the purchase of high quality, short maturity bonds and blue chip stocks; diversify across sectors and countries; place stop loss orders; and hold cash and cash equivalents in bear markets. These strategies aim to protect investors against large losses due to major market declines.
Defensive investing strategies are designed to offer protection first and modest growth second. With an offensive or aggressive investment strategy, on the other hand, an investor tries to take advantage of a bull market by buying securities that outperform for a given level of risk and volatility.
An offensive strategy can also involve options trading and margin trading. Both offensive and defensive investment strategies require active management, so they may have higher investment costs and tax obligations than a passively managed portfolio. A balanced investment strategy combines elements of both defensive and offensive strategies.
A defensive investment strategy is one of the many options when managing a portfolio. Portfolio management is both an art and a science and portfolio managers must make critical decisions for themselves or for their clients, taking into account specific investment objectives and selecting an appropriate asset allocation. while balancing the risk and the potential reward.
Many portfolio managers adopt defensive investment strategies for risk-averse clients, such as retirees without a stable salary. Defensive investment strategies might also be appropriate for those who do not have a lot of capital to lose. In both cases, the goals are to protect existing capital and keep pace with inflation through modest growth.
Defensive investment strategy Investments
Selecting investments in high-quality, short-term bonds, such as treasury bills and blue chip stocks, is a solid tactic for a defensive investment strategy. Even when selecting stocks, a defensive portfolio manager will stick to established big names with a good track record. Today, that portfolio manager is more likely to turn to exchange-traded funds (ETFs) that mimic market indices, as these provide exposure to all established stocks in a single, diversified investment.
A defensive portfolio manager may also hold a mass of cash and cash equivalents, such as treasury bills and commercial paper, which can help keep pace with inflation and protect the portfolio. in the event of a downturn in the markets. However, keeping too much cash and cash equivalents can raise questions about why investors pay for active management in the first place.
Defensive stocks are stocks that offer consistent dividends and stable earnings regardless of the state of the stock market as a whole. There is a constant demand for their products, so defensive stocks tend to be more stable during different phases of the business cycle. Defensive stocks are also less likely to go bankrupt due to their relative strength during downturns. On the flip side, the low volatility of defensive stocks often results in lower gains during bull markets and can lead to a cycle of poor market timing.