While earning through investing will always be desirable, there may come a time in which your primary goal is to minimize the risk of losing money. In this case, you may want to use a defensive investment strategy.
Keep reading to discover how to create a portfolio that follows this approach, and to learn the considerations you’ll need to make before choosing to go defensive.
Playing defensive
In executing a defensive investment strategy, you’ll need to pick the right assets. These typically include short-term bonds (especially those issued by the government) and defensive stocks.
Both have relatively low volatility and are likely to hold their value even in tough times. Cash and Money Market placements are also viable options, especially of you’d like to be nimble for potential market swings.
After that, you’ll have to set your desired allocation for these assets. Keep in mind that you should be diversifying properly by not having too much money in just 1 asset class or industry.
Considering the asset correlation is key, because it will help your portfolio stay in good overall shape even if the investing climate changes.
Once you’ve finished this, there’s still maintenance to be done. Experts recommend that you rebalance regularly according to the performance (in this case, it refers to minimal volatility rather than growth) of these assets.
Defensive costs
Remember that, like great power coming with great responsibility, lower risk comes with lower earning potential. Your money may still grow, but not at the rate at which it could if you choose a more aggressive (and higher risk) approach.
Of course, depending on your situation and preferences, you may find this to be an acceptable trade-off. This is especially true if the circumstances make you shift your priority to preserving your money instead of trying to grow it.
Still, this is a decision that you’ll need to spend some time on before you make it.
Separate portfolios, different approaches
If you don’t want to liquidate your current assets because you believe in their ability to recover in time, you can consider creating a new portfolio that follows a defensive strategy.
While this won’t do anything about the risk faced by your older portfolio, the money placed in the defensive portfolio may not be as affected by volatility, and so it may keep its value and even experience modest growth.
What if you were following a peso-cost averaging or value averaging strategy? If you begin to place your investible cash in the defensive portfolio instead, remember that this will reduce the returns that your older portfolio will give you.
If you were trying to earn a certain amount by a specific date, you’ll have to redo your calculations to see how much you might end up with instead.
Taking this multi-portfolio approach can add a little stability and reassurance to your investment journey while staying open to the possibility of more growth in the future.
