There are several reasons to invest. These can be as general as building wealth or as specific as preparing for retirement or the education fund of children. Outpacing inflation and preserving capital or wealth are other specific reasons to invest. However, investing has risks, and investors need to manage and lessen the uncertainties that come with their investments
A defensive investment strategy is a specific investment paradigm and strategy that aims to minimize the risk of losing the principal invested amount through a conservative approach to portfolio allocation and management. It aims to preserve the entire portfolio while ensuring that it remains productive or continues to generate gains.
The 5 Core Principles of a Defensive Investment Strategy
Note that a defensive investment strategy is not for everyone. It might have advantages that benefit certain investors but it also has drawbacks or disadvantages that might not be suitable for others. Nevertheless, in certain instances or situations, the best offense entails the best defense. The following are the principles of a defensive investment strategy:
1. Prioritizes Protection First and Growth Second
One of the core principles of an investment strategy that leans toward a defensive stance is to protect the investment first before prioritizing gains. It is a risk management and wealth preservation strategy. Protection means preserving either the principal or the accumulated gains derived from investing. Of course, it is still important to reiterate the fact that all investors need to manage the risks that come with their investments and ensure that their investments remain either intact and continue to provide them with returns.
2. Minimizes Losses During Downturns and Slumps
A defensive investor aims to minimize losses during downturns in the financial markets or slumps in the overall economy. These investors may take a more aggressive or offensive approach during periods of strong economic growth. However, during market crashes or economic slumps, these investors revisit and adjust their portfolios to minimize their losses. A defensive investment strategy requires an active investing approach that involves the regular rebalancing of a portfolio to maintain an intended asset allocation.
3. Suits Investors With a Conservative Risk Profile
Remember that this investment strategy is more on protection or preservation. Aiming for returns come as a second priority. However, with low risk comes low returns. Nevertheless, this strategy is suitable for investors who have a low tolerance for losing money on investments, are uncomfortable with significant swings in investment values or market movements, dependent on the income generated by their investments to cover their regular expenses, and are willing to set aside the maximum return potential that comes from investing.
4. Invests in Defensive Assets and Investment Channels
Another principle of a defensive investment strategy is straightforward: it entails finding and buying defensive assets and other investment channels. These include cash and cash equivalents or products in the money market, high-quality short-term and medium-term bonds such as the United States Treasury Bonds, so-called defensive stocks and some value stocks from defensive sectors that pay regular dividends, productive real estate properties that generate an income such as rental properties, defensive pooled funds, and commodities such as gold and oil.
5. Involves Maintaining a Productive Investment Portfolio
While it is true that a defensive investment strategy prioritizes wealth preservation or the protection of capital from losses, defensive investors also need to receive a substantial amount of returns through active portfolio management. Remember that this strategy is suitable for risk-averse investors such as retirees or those individuals without much capital to lose. It is important to keep their capital or investments intact while ensuring that such remain as productive as possible not to achieve high growth but to keep pace with inflation.