A buzzword that dominates the investment world is the term ‘blue-chip’ when trying to describe certain stock options available to the investor.
Emerging in the 20th century, the Cambridge Dictionary defines the word “ a company or investment is one that can be trusted and is not likely to fail”, implying that the stock or company is naturally safe. However, few things like this are certain.
In uncertain times like these, investors will naturally favour a safer investment route as they look to protect their current investment and any possible returns. Typically, markets have favoured these blue-chip corporations for the simple reason that access to capital was typically limited. However, today’s market are substantially different as capitalism and access to financial markets have opened up to encompass a wider community. Furthermore, the reliance on technology for businesses in today’s economy and the increasing level of development means investors cannot solely rely on selected companies or stocks for an investment option
So what can investors do to protect their investment?
Defensive investment strategy
You are probably wondering what a defensive investment strategy is. Simply a defensive investment strategy is a conservative method of investment allocation and management aimed at minimising the risk of losing capital. In similar nature to a traditional investment strategy, a defensive strategy entails regular portfolio rebalancing but encompassing a greater emphasis on protection.
When are defensive investment strategies most commonly used?
While defensive investment strategies can be adopted by every investor, they are most commonly advised by portfolio managers for risk-averse clients without a steady cash flow or substantial financial backing. In both cases, the core objective of a defensive strategy is to protect the existing capital while ensuring modest growth in the portfolio.
What would a defensive investment strategy look like?
Defensive investment strategies will naturally look for investments with lower risks and a variety of asset types. While a defensive investment strategy can take shape in a number of formats, typical investments in a defensive portfolio usually include high-quality, short-maturity bonds, stock-exchange traded funds that mimic market-trends and high-quality established company stocks (blue-chip stocks).
While a defensive strategy will predominantly look for safe, low-risk investment options, a defensive investment strategy could also be described as portfolio diversification, where you, an investor, will spread money across several sectors. Portfolio diversification can be further accompanied by portfolio rebalancing – the changing of assets depending on how investments perform.
Beyond choosing relatively safe asset types, defensive investment strategies can take shape in a number of different formats and it ultimately relies on the current situation of the individual investor.
The benefits of a defensive strategy
Although they are not as known as some of the more aggressive investment strategies, a defensive investment strategy provides investors with a unique set of benefits.
1. Preservation of capital
One of the most beneficial elements of a defensive strategy is the core concept of preservation of capital. While every investor wants to make thousands of Pounds, Dollars or Euros from their investment, the protection of their investment will often be an investors number one concern. This will generally mean in difficult times or in the case of a market downturn; investors will typically see a smaller loss of capital than their counterparts.
2. Confidence in Investments
While defensive investment strategies not only provide investors with physical protection to their investment, it provides investors with a sense of confidence in the state of their investment. This is most certainly the case for investors who cannot cope with a significant shift in the form of their investment or who cannot cope with a large loss of capital.
Defensive strategies promote the continued cash flow from an investment portfolio to an investors pocket through the selection of certain asset types. Although defensive strategies naturally pursue safe investment options, defensive strategies look to provide a continued income through growth dividends, even in times of market difficulty.
What does it mean to have a defensive investment strategy and how can you develop it?