The investment world is full of technical lingo, with a variety of investment styles, categories, and products pulling for investors’ attention and money. One way to simplify all this information is to look at the overriding theme of defensive investments and offensive investments, and how they work together in varying degrees to create a customized portfolio that is both diversified and positioned for growth.
Defensive investments help protect your portfolio from a large stock market drop and during an economic recession. Although they may seem few, there are a multitude of different investments that can be added to a portfolio to achieve this goal. Certain sectors of the economy tend to perform better during tough economic times such as consumer staples, healthcare, and utilities. Bonds can also perform well during downturns, such as US Treasury bonds and inflation protected bonds. ETFs that are focused on large corporations with strong balance sheets is another way to find safety during economically tumultuous times.
Offensive investments move similarly or with more volatility than the overall stock market, and they generally perform very well when the stock market is rising but suffer during market drops. Just as some sectors of the economy perform better during tough economic times, others outperform when the economy is humming along and expanding. These sectors include consumer discretionary, technology, and industrials. ETFs that are focused on high growth stocks are another offensive investment option. Leveraged ETFs are an ultra-offensive option for very aggressive investors who understand the enhanced risk associated with these investments.
Defensive investments are an important part of a portfolio because they provide some peace of mind during a market downturn. The flipside of their protection during economic downturns is that they often don’t perform as well when the stock market is rising. Historically, over multi-year time periods, the stock market rises 70% of the time and only falls 30% which leaves a buy and hold strategy of defensive investments significantly underperforming the overall stock market. In turn, investors looking for high investment returns, and who are comfortable with higher risk, should have a larger portion of their portfolio in offensive investments.
Skilled portfolio creation is combining the right portion of defensive and offensive investments to create a diversified portfolio that will be more stable in all market conditions while also be positioned for growth. The cyclical nature of the stock market also needs to be considered and good investing is knowing when to increase or decrease these investments with the market cycles to achieve higher returns.
Photograph by: Mpho Mojapelo on Unsplash
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