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How to Build a Defensive Portfolio

How to build a defensive portfolio

They do say that defense wins championships, but that’s a football thing, so does this phraseology also hold true within the world of investing? Well, that all depends on what you as an investor define as a championship. What’s the ultimate goal of your portfolio? What’s your endgame? What would indicate success for you personally?

Whatever your goal, building up a defensive aspect to your overall portfolio, and even creating a separate one specifically for this purpose, can be a worthwhile pursuit if done correctly. 

First let’s define a defensive portfolio

A defensive portfolio is one that aims to mitigate losses and promote resilience, mostly during tumultuous times in the market, much like what we’re experiencing now. Although preventing losses is never a guarantee just because we go defensive, we could decrease the odds of larger dips and volatility by adopting this strategy. 

For a custom defensive portfolio that buys individual equities to achieve this classification, it’s going to require first pursuing some high-quality defensive stocks that you determine will make up the holdings, while also being sure to remain diverse as well. 

So, what are defensive stocks then?

Simply put, a stock that’s defensive in nature is one that tends to do better than others in an overall bearish environment.

Relative to our analogy, defensive stocks are supposed to be good at preventing losses from scoring on your portfolio, and even helping you score a little too if they can get those metaphorical turnovers in the form of solid returns, low volatility and dividends. 

Characteristics of defensive stocks

A defensive stock is a stock that is less likely to be impacted by market conditions and might be less volatile than growth stocks in a bearish market and provide a higher level of stability.

Some of the characteristics of defensive stocks are

  • They have low P/E ratios
  • They have low beta
  • They pay a dividend
  • They have high cash levels
  • They’re well-established companies with a past, present, and future. (Keep in mind nothing is guaranteed).

Stay Curious: Stocks that Could Defend your Portfolio from Inflation.

Keep in mind nothing is guaranteed. There were plenty of household names like Blockbuster that are not around anymore. 

Designing your own defensive portfolio

You certainly don’t have to craft your own defensive deck of stocks if you don’t want to, there’s already plenty of funds out there that exist exactly for this purpose. But, as the old adage goes, “if you want something done right, do it yourself.” 

Some investors just enjoy curating their own portfolios, and that’s part of the fun of investing. So, if that’s you, here’s some tips for bringing your defensive dreams to life. 

  • Stay diverse: A defensive stock could be a lot of different things. It might be a manufacturing company, a consumer staple, a medical stock, or anything else under the sun that fits the criterion. Because of this, it can be easy to accidentally over allocate to a certain niche, and leave yourself overly exposed to that sector’s risk factors. It’s important to avoid this, and remember to diversify your holdings across industries. 

Is Diversification a concern of yours? Download Front and connect your brokers to see your stocks and crypto at a glance and learn how well diversified is your portfolio. 

  • Have a timeline: The defensive stocks ideology is something mostly intended and designed for rough times in the market, and some of these equities may very well underperform during more prosperous times for investors. So, you should have a timeline in place before diving in here. Although some people may want to hold a few defensive positions forever, for most it would be prudent to have an exit strategy in place, outlining at which point you will get out. 

Are defensive stocks from the defense sector? Not really. Read the difference between defensive stocks and defense stocks. 

  • Allocate properly: Aforementioned above, defensive stocks are primarily suited for certain market environments. This means that it might not be the best idea to ever put the entirety of your portfolio into this strategy at any given time, and that staying diversified across other more broad investments while also getting a little defensive is usually an ideal strategy. 

All third-party links and any related material are not the opinions of Front, nor does Front purport to have ownership over any such material or information presented therein. The preceding article does not constitute a recommendation to buy, sell, hold, or pursue any specific investment. 

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