Fortunately, there are three very effective defensive investment strategies you can use to help protect your portfolio. Each one involves an approach that is slow and steady.
During tough economic times, dividend stocks can provide a solid long-term return potential. But when the market takes another leg down, gains can be at risk.
Defensive dividend stocks are typically low-beta stocks, which are less volatile than the broader market. They’re usually found in sectors like consumer staples or healthcare, and they’re expected to perform in any economic condition.
A strong foundation is crucial to a defensive stock’s ability to survive an economic downturn. General Motors has a stable financial structure and is one of the most reliable stocks for investors. It includes Chevrolet, GMC, Buick and Cadillac brands. It also has a huge range of products.
The Coca-Cola Company is another great defensive stock, as it pays a nice 2% dividend. The company has a robust brand and an economic moat. It is also a large blue-chip stock that offers a variety of consumer products.
Novartis AG is a Swiss pharmaceutical company with a high ROE of 23%. Its product line includes some of the strongest brands in the world. The company’s margins are also strong. The company’s share price has been flat since February.
The company has a beta of 0.33, which is roughly one-third as volatile as the broader market. It’s also been a good performer since the COVID-19 coronavirus scare.
Farmer Mac has been giving massive dividend increases over the last decade. The company has been paying out over $4.3% of its profits in the past decade. The stock has been king of the growth sector in recent years.
These are just a few examples of defensive stocks that are thriving in these times of volatility. It’s important to consider the pros and cons of these stocks before making an investment.
High debt loads
Historically, high debt loads have been one of the best defensive investment strategies available. In fact, a recent study by the Institute for International Finance shows that global debt to GDP has climbed to 356 percent of global GDP, up 30 percentage points from five years ago. However, this figure may be overstated, as some countries are more susceptible to the effects of excessive debt than others.
When considering the optimal debt load for your company, there are several factors to consider. For starters, a large debt load is a major risk factor, as a company could find it difficult to refinance the loan at maturity. Also, a company’s ability to pay back a loan could be negatively affected during a downturn. Additionally, a company’s ability to generate and retain recurring revenue is often less vulnerable to a recession. Companies with a robust capital structure, such as a solid credit rating and high liquidity, are often able to weather a downturn with little trouble.
The best strategy for managing debt is to identify your key financial metrics, determine your optimal debt load, and then formulate a debt management plan. Then, consult a financial professional to ensure you are making the most prudent decisions possible.
In the midst of a bear market, you should definitely look into a defensive strategy. For example, a homeowner who borrows against his or her equity can realize tax advantages. And, as a long-term investment strategy, borrowing against a concentrated stock position can provide a balanced approach to a portfolio. If you can make the required monthly payments, the financial reward is likely to outweigh the cost.
While a mortgage is a good example of a traditional loan, it’s also worth noting that affluent individuals can borrow against their own capital in order to defer capital gains tax.
Using a combination of active and passive investments to create a comprehensive portfolio is a good idea, but the best way to reduce market risk is to build a robust defensive position. The most obvious choices include utility stocks and real estate equities. The latter are usually more resilient during market downturns. The former, in particular, have seen dividend growth rates that are well deserved. Using a mix of both can help you preserve your capital during a recession.
A flurry of activity in the fixed income space can be a source of income in and of itself, but it can also provide a hedge against the evaporation of capital in a recession. A good example is a diversified set of municipal and US government bonds. These are particularly safe bets due to their low default rates and tax treatment.
Alternatively, you could try out a new breed of ultra-high-yield corporate bonds. Regardless of your investment tastes, a solid blend of the two is the only surefire way to ensure your retirement funds are protected in a downturn. The best way to do this is to find a reputable fund manager and stick with them. They will be happy to discuss your portfolio in detail and work with you to develop a plan to help you meet your financial goals. They are also likely to recommend products and services to suit your needs.
Weak cash position
Investing in a strong cash position is one of the best defensive investment strategies. This is because it allows you to buy quality companies at bargain prices. You’ll also be protected from the downside of a bear market.
When you’re looking to move to a more defensive portfolio, the first thing to do is evaluate your risk tolerance. This includes how comfortable you are with losing money. It’s a good idea to take a Vanguard Investor Questionnaire to determine your risk tolerance. You’ll then need to decide how much capital to devote to defensive investments. This can be as little as 20% to 30% of your overall portfolio.
The other thing to consider is how to best rebalance your portfolio. This is a process that involves adjusting your investments based on their performance. You may choose to liquidate assets that are performing poorly. Alternatively, you can rebalance by putting your capital into traditional growth assets.
Using a stop-loss order is another tool you can use to minimize your losses. This is a way to tell your stockbroker to sell a stock if the price falls. You might also want to look into buying high-quality short-maturity bonds as part of your defensive portfolio.
Another tactic is to use a federally insured savings account to protect your funds. These accounts usually offer rates that are lower than inflation.
The other key to a successful defensive investment is to avoid stocks with high valuations. This is because these stocks tend to fall the most when the market goes down. It is also a good idea to avoid stocks that are overly high-visibility.
Other investments to consider include bonds, gold, and exchange-traded funds. These can be considered defensive because they’re low-risk and provide a decent dividend.
Slow and steady approach
Choosing to invest in defensive investments can be an important way to reduce your risk and protect your investment portfolio. This strategy involves buying high quality bonds, cash, and dividend-paying stocks. It can help you ride out market downturns and keep you on track for your long-term financial goals. However, it’s not risk-free.
Defensive investments are often low risk and predictable. They can be particularly appealing to investors planning for retirement. They are also less likely to fall in value during a recession.
While the stock market is a volatile place, it’s not impossible to earn significant gains in a downturn. It’s important to pay attention to the bigger picture and avoid knee-jerk reactions to market fluctuations.
Rather than buying and selling defensive investments on a short-term basis, a slow and steady approach can offer the best results. This approach involves buying and holding a diversified portfolio of traditional growth assets. When the market turns up, you can move your money back into more aggressive investments.
Some investors opt to reinvest their dividends. However, it can backfire if the payouts aren’t sustainable. For instance, companies that have solid fundamentals but whose share prices zigzag on market news may be better off selling.
In the early stages of a recession, utility stocks and consumer staples may be safe bets. If the economy begins to falter, healthcare and financial services may replace these sectors.
The Fed has not ruled out further rate increases in the next two years, so you may want to shift your portfolio to a more conservative path. Regardless of the market outlook, you can still reap impressive gains in the later stages of the game.
When transitioning into defensive investments, it’s important to ensure you have a plan for how you will move your money back to more aggressive investments once the recession ends. It’s also a good idea to diversify your portfolio across asset classes to improve your return potential.