If you want to invest without your heart rate tracking every market fluctuation, defensive investing might be for you. With defensive investing, you take little risk and aim for steady returns. But what exactly is defensive investing? And is this investment strategy right for you? In this article, you’ll find answers to these and other questions.
Not a BUX investor yet? Create your account
Defensive: a definition
Defensive means ‘focused on protection’ and is the opposite of offensive. In daily life, you see it everywhere – with sports teams wanting to hold onto a lead or gamers wanting to defend their base. You play to move forward, but in a way that limits your risks.
Defensive investing: the meaning
Defensive investing means taking as little risk as possible, with the goal of preserving your wealth and potentially achieving modest profits. You invest safely with a well-diversified portfolio. Whereas offensive investors hunt for high returns, defensive investors choose stability.
Defensive investing is primarily about two things:
- Wealth preservation: You want to protect your wealth against large losses.
- Stable growth: You accept a lower return to experience fewer fluctuations in your portfolio.
What is very defensive investing?
Sometimes you want to take even less risk than standard defensive investing. In that case, you choose very defensive investing. You invest, for example, in short-term bonds and limited percentages of stocks. The focus is on stability and limiting loss.
This is a strategy that suits investors who value certainty and for whom achieving a desired return is less important than protecting their assets.
What is a defensive investment?
A defensive investment is an investment with relatively low risk. They are not immune to market movements, but they move along more calmly. The three classic defensive sectors are utilities, food & beverages, and healthcare. These companies provide products and services that people always need, meaning their stock prices often react less violently to economic changes. That is why these are also called defensive stocks.
Additionally, a defensive portfolio often includes:
- bonds with high creditworthiness;
- short-term bonds that are less sensitive to interest rate movements;
Defensive funds or ETFs that offer diversification without too much volatility.
How does defensive investing work?
With defensive investing, you construct your portfolio in such a way that it is less sensitive to major market movements. You do this, for example, by investing in more stable companies that keep running, even when the economy dips. Think of sectors like healthcare, energy, and daily consumer goods.
Additionally, a defensive profile usually consists of more than half bonds, often around 70% versus 30% stocks (this is not a fixed rule). Bonds have a fixed term, you know when you will get the money back, and the risk is lower than that of many stocks. But be aware, all forms of investing carry risks.
Because defensive investing fluctuates less, it is suitable for the longer term. You build wealth steadily, without needing to check the market status every day.
Defensive risk profile: the characteristics of a defensive investor
There is no such thing as the ideal defensive investor. The composition of this type of investor differs per party. Therefore, the advice is to check the composition beforehand.
However, you can look at a number of characteristics:
- You prefer to choose stability over risk.
- You don’t want to monitor price fluctuations every day.
- You choose a highly diversified portfolio.
- You want to invest with a predictable strategy.
- You balance between ambition and certainty that fits your investment goal.
- You invest in more bonds and less in stocks.
The 3 risks of defensive investing
Defensive investing sounds less risky. Yet, this investment strategy also has risks. Namely price, interest, and goal risk. Let’s take a look at those.
1. Price risk
Although the prices of stocks move more than bond prices, bonds also carry price risk. The fluctuations are often smaller, but not absent. Past performance is no guarantee of future results, and that applies to a defensive strategy too.
2. Interest rate risk
Interest plays a role with bonds: the interest rate risk. If interest rates rise, new bonds pay out more interest and existing bonds become less attractive. And to compensate for that unattractive position, the price falls. If interest rates fall? Then the price rises.
When you hold the bond until the end of the term, you get your invested money back as agreed. But do you have to sell early, for example because you need your assets for something else? Then that can lead to a loss.
3. Goal risk
If you invest too cautiously, your investment goal may be jeopardised: the goal risk.
Inflation plays a role in this. Inflation makes money worth less. € 1000 today is likely worth less in ten years. If your return is lower than inflation and taxes, you lose wealth, with the danger that you won’t achieve your goal.
Offensive investing versus defensive investing
As you read earlier, offensive investing is the opposite of defensive investing. The main difference lies in the amount of risk you take.
With defensive investing, the emphasis lies on safety and stability. This means that defensive risk profiles choose less risky investments. Like bonds. They deliver a lower return but also have a lower risk. Offensive investing, on the other hand, is about taking higher risks in exchange for potentially higher returns. This can involve investing in stocks, options, or futures.
Neutral investing
You don’t need to have a fully defensive or offensive risk profile. Neutral investing combines both: you choose a balance between risk and return, where you have both safe and growth-oriented investments in your portfolio.
Is defensive investing right for you?
Defensive investing can be a good choice for the beginner investor who wants to get to know the market or the investor who is cautious. It can also be a good move if you have almost achieved your investment goal and do not want to run any major risk anymore. Such as pension investors.
You want to invest with less stress, grow your wealth without taking major risks, and are satisfied with a lower return than with offensive investing. Additionally, you place more value on wealth preservation and are less focused on rapid growth.
Not a BUX investor yet?
Create your account in a few minutes and start building your wealth.
Investing involves risks. You can lose your investment.
All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
