Just as a truly great football team needs a strong defence to stop their opponents from scoring as well as the more dazzling strikers who will put the ball in the back of the net, so a balanced portfolio needs some defensive investments to counteract the riskier ones.
Defensive stocks, like their footballing counterparts, are not the stars of the show and won’t provide the exciting highs but they are the dependable workhorses, providing regular earnings, and often dividends, regardless of how the stock market is doing. Of course all companies are affected by general economic conditions to a degree but some are more resilient than others and can deliver stable results and cash flows even during volatile periods. The sectors of healthcare, defence and utilities usually fall into this category.
2015 has been a volatile year on the stock market in large part due to the economic slowdown in China but exacerbated by other factors including falling oil prices and the expectation that interest rates in the US will soon rise. In a bear market such as this, there is definitely a place for defensive investing, even for the most gung-ho of investors. As ever, diversification is key however, if your tolerance to risk is low, you will undoubtedly err on the side of caution and similarly, if your investment time horizon is short, you should allocate a larger proportion of your investments defensively.
There are a number of ways to do this:
Choose an equity fund which is actively managed by a manager known for their more defensive style and who will in times of weakness in the markets favour companies with a more dependable track record or reallocate assets favouring cash until markets strengthen.
Invest in a targeted absolute return fund. These use a wider range of investment techniques than their more traditional comparisons and aim to achieve positive returns regardless of the underlying market conditions. They use a technique called ‘short-selling’, borrowing equities they believe will perform badly in order to sell and then buy them back at a lower price.
Go for a ready-made defensive portfolio. These off-the-shelf products take all the hard work out of investing. Experts have already selected the asset allocation to fit a cautious risk profile and will continue to monitor the portfolio, making adjustments as necessary.
Of course, however defensive you choose to go, bear in mind that, as always, the value of your investments could still go down as well as up although with more players in defence, you are more likely to keep out unwanted goals and avoid heavy losses.
For investors looking to minimise downside risk and protect their capital Infinity offer defensive multiple asset portfolios professionally managed by our partner Tilney Bestinvest. If you would like more details please get in touch by clicking this link