What is Defensive Investing?
Defensive investing Portfolio, a concept championed by Benjamin Graham and endorsed by numerous esteemed analysts, represents a prudent and time-tested approach to wealth preservation and sustainable financial growth. In a world characterized by market volatility and economic uncertainties, defensive investing prioritizes capital protection and steady, reliable returns. This strategy involves meticulously selecting well-established companies with solid fundamentals, a history of dividend payments, and conservative financial practices. The goal is to weather market storms while generating consistent income and long-term value appreciation. Defensive investors emphasize intrinsic value over market trends, adopt a long-term perspective, and remain unswayed by short-term market fluctuations. By adhering to these principles, defensive investing empowers individuals to navigate the complexities of the financial landscape with confidence, resilience, and a focus on enduring financial success.
Why it takes more importance in times of high inflation?
In times of high inflation, the significance of adopting a defensive investment strategy becomes even more pronounced. The eroding effect of inflation on the purchasing power of money can significantly undermine the real returns on investments. Therefore, defensive investing takes on added importance as a shield against the wealth-eroding impact of rising prices.
A defensive investment strategy, prioritizes stability and capital preservation. When inflation is high, stocks and bonds may become more volatile, making it challenging for investors to predict how their portfolios will fare. Defensive investments, typically comprising established companies with strong financial positions and dividend-paying histories, offer a haven of reliability. These companies often possess the ability to pass on rising costs to consumers or adapt to changing economic conditions, making them less susceptible to the erosive effects of inflation.
Moreover, defensive investments such as dividend-paying stocks can provide a valuable source of income that tends to grow over time, potentially outpacing inflation. This income stream can act as a hedge against the rising cost of living, helping investors maintain their purchasing power in real terms.
In essence, when inflation is a concern, embracing defensive investing principles can offer a pragmatic and effective strategy to safeguard wealth, generate consistent revenue and navigate the financial markets with greater confidence and resilience.
2 Example of Defensive investing Portfolio
Income-Driven Defensive Portfolio:
- Dividend Stocks (40%):
- Procter & Gamble (PG)
- Johnson & Johnson (JNJ)
- Coca-Cola (KO)
- PepsiCo (PEP)
- Bonds (30%):
- iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Real Estate Investment Trusts (REITs) (15%):
- Vanguard Real Estate ETF (VNQ)
- Simon Property Group (SPG)
- Preferred Stocks (10%):
- iShares Preferred and Income Securities ETF (PFF)
- Bank of America Corporation Preferred Stock (BAC-PL)
- Utilities and Consumer Staples (5% each):
- Utilities ETF: Utilities Select Sector SPDR Fund (XLU)
- Consumer Staples ETF: Consumer Staples Select Sector SPDR Fund (XLP)
Tactical Asset Allocation Defensive Portfolio:
- Cash or Cash Equivalents (10%):
- Hold cash or use a money market fund.
- Defensive Stocks (20%):
- Healthcare Stock: Johnson & Johnson (JNJ)
- Consumer Staples Stock: Procter & Gamble (PG)
- Utility Stock: NextEra Energy, Inc. (NEE)
- Government Bonds (30%):
- iShares 7-10 Year Treasury Bond ETF (IEF)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Gold and Precious Metals (15%):
- SPDR Gold Trust (GLD)
- iShares Silver Trust (SLV)
- Hedging Strategies (25%):
- ProShares Short S&P 500 ETF (SH) – Inverse ETF for hedging against market declines.
- Invesco QQQ Trust (QQQ) Put Options – Used for downside protection.