Stock investors constantly hear the wisdom of diversification. As the age old wisdom goes, "Don't put all your eggs in one basket". This not only helps in increasing the performance or return on investment but also in mitigating the risk. It does make sense to diversify your hard-earned money against the roller-coaster market. There are many ways of diversifying and depends upon investments in various stocks and sectors. We look at the following portfolio types: Defensive, Income, Aggressive, Hybrid and Speculative. In this post, I will be concentrating mainly on Defensive Portfolios.
The Defensive Portfolios aim to preserve capital with secondary objective of income and inflation protection. Defensive Stocks do not usually carry a high beta (volatility w.r.t. market) and are isolated from broad market movements. They are deemed as "non-cyclical stocks". Cyclical stocks, on the other hand, are sensitive to 'Business cycles' and are strongly tied to the overall economy. For example, during the times of recession, companies that tend to basic needs do better than those are focused on luxuries.
So, what are some sectors that would be deemed defensive? For starters just think of the essentials in your life and find companies that make these products. It can be anything ranging from: foods, beverages, utilities to pharmaceutical and medical stocks. They will always be in demand and less affected by the market performance.
|Long term Performance Compared to Benchmark (20% S&P500 + 80% Barclays Aggregate Bond Index|
To sum this up, defensive portfolio is prudent for most investors and dividends offered by most of these companies help to minimise downside capital losses. Although, defensive stocks rarely tend to see high rates of organic growth, they are suitable for investors who want to play safe.
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