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Could defensive stocks help boost your portfolio in 2022?

Could defensive stocks help boost your portfolio in 2022

It is no secret that the first half of 2022 has been hard, to say the least, for the stock market. Since the end of last year, the Dow Jones is down 9%, the SPY is down 13%, and the Nasdaq 100 is down a staggering 22%. The Dow experienced its longest losing streak since 1923, with 8 consecutive weeks in the red. 

The Fed has started to raise interest rates, and many analysts are expecting many more interest rate hikes this year. A Deutsche Bank research strategist, Jim Reid, has recently said that “Not every Fed hiking cycle leads to a recession, but all hiking cycles that invert the yield curve have [historically] led to recessions within one to three years”. With the stock market being so volatile over the past six months, many people are looking at different investing strategies. 

The strategies used during the pandemic were considered “risk-on” strategies, and now with the current market sentiment, many people are starting to flock to “risk-off” strategies. One such “risk-off” strategy is to start investing in defensive stocks. So, what are defensive stocks, and how can they help you boost your portfolio in 2022?

What are defensive stocks?

We have covered defensive socks in a previous article here, but to sum it up:

A stock that’s defensive in nature tends to do better than others in an overall bearish environment. These stocks tend to be in industries with a slower growth rate, such as consumer staples and healthcare. They generally have low volatility, a low P/E ratio, a high dividend, and a long history of success. 

A great example of a defensive stock is Coca Cola ($KO): it has shown over 30 years of dividend hikes, has increased its earnings per share almost every year (except in 2020 due to the pandemic) in any market condition, has a P/E ratio which is under 30, and finally has a high Sharpe ratio.

coca cola dividend yield over 10 years

Coca-Cola has been consistently increasing its dividends per share for over 10 years. Via [Seeking Alpha].

There’s a lot more to consider than P/E ratio and Sharpe ratio when picking stocks, so make sure to do your diligence before considering investing in $KO or any other financial assets. 

We mustn’t confuse defensive stocks with defense stocks. A defense stock is the stock of a company that works in the defense industry. Gun stocks and military contractor stocks such as Raytheon or Lockheed Martin fall into this category. Defensive stocks are entirely different.

Learn more about the difference between defensive stocks and defense stocks. 

So, could defensive stocks help boost your portfolio in 2022?

First of all, no stock is immune to risk. While some stocks carry less risk than others, all companies can fail, and all stocks can go to 0. Investing in defensive stocks does not guarantee in any way a return. Therefore, the most important element to have when investing is a clear plan. If the investment does not go as expected, understand why you are buying a certain stock, have clear price targets, and have a clear entry and exit plan.

Sometimes in the stock market, the riskiest strategies are the ones that can give the highest returns. They are also the strategies that could wipe out a person’s account by lunch. The subreddit wallstreetbets has documented hundreds of degenerate trades that either minted new millionaires or made people lose years of savings when it takes to drink a coffee. 

On the flip side, people with conservative and diversified portfolios do not experience much volatility in their accounts. Generally, they have an account trending upwards over a long period. They never go “all-in” on a single trade or company and understand that the stock market always has cycles.

Sometimes, everything seems like it has been trending up for a long time, and other times it seems like stocks can’t stop falling. Experience and control of one’s emotions can help us not get carried away by the market’s constant swings.

Defensive stocks may fare better in a bear market, and thanks to dividends, we get paid to hold the stock. No matter what market we are in, there will always be opportunities that present themselves, from an IPO to some news to simply valuation plays where a stock is undervalued. 

Some stocks are currently trading near their 2018 levels, even though they may have doubled or tripled their revenue or business model. Finding inefficiencies in the stock market and having a clear plan could make a portfolio shine.

Keep Reading: How to build a defensive portfolio. A beginners’ guide. 

The Bottom Line

Some people believe that the best way to build wealth over time is to have a diversified portfolio that you can dollar cost average (DCA) over time. The stock market’s general trend for 10 years has always been historically up. Therefore, for instance, consistently investing in diversified index funds could be considered a safe bet for most investors. 

Overall, defensive stocks have their place in any portfolio, but they should not be the only stocks that one holds in his portfolio. This is because bear markets could create opportunities to invest. 

If you don’t like volatility and cannot stomach large drops in your portfolio, defensive stocks could be a good choice. This is especially the case for people who are about to start cashing out of their portfolio to enjoy retirement: we don’t know when the stock market will recover, so it may be wise to have a heavier allocation to defensive stocks to maintain a high cash flow in any market situation. Therefore, before buying any stock, ask yourself why you are buying it and the plan. 

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