Defensive Investment Strategy

The defensive investment strategy is one that is geared towards protecting the invested principal sum from losses.

On the football pitch, defenders are the ones who hold the fort and strive to prevent the possibility of a goal against the team. Of the many investment strategies, the defensive investment strategy is one that is geared towards protecting the invested principal sum from losses.

The strategy is a very conservative form of portfolio allocation and management and its aim is to protect the investors from the range of significant losses that could arise from market downturns first before aspiring to a degree of growth.

As such, this strategy is for the overly risk-averse investor who is willing to give up the possibility of higher earnings and returns, just so he or she can stay within a safe level of controlled risk.

The opposite of a defensive investment strategy is an aggressive or offensive one which is bullish towards speedy earnings or dividends and investment growth. However with the defensive, the investor takes on a safe position behind the rest of the investment team and ensures his or her investment’s safety.

In situations where the investors by themselves are not managing the portfolios, the fund managers or portfolio managers in question, would adopt a defensive position as well on their behalf, allowing them invest in securities that are safe.

The challenge with this as far as the capital market goes, it might be hard to track investments that are steady enough without adverse movements.

It also requires a very active form of portfolio management (which could come at certain additional cost), as there needs to be a consistent level of portfolio re-balancing so as to stick to a clearly stated asset allocation level.

The stocks that are known to tick all of these boxes are usually the big stocks who have been able to penetrate the market and now own large market shares.

Therefore, the investor who wants to take a defensive approach to investing would need to focus on purchasing high quality stocks while also keeping a stable diversified investment portfolio that cuts across sectors, currencies, and countries.

He or she must also make use of hedging mechanisms to ensure that possible losses are mitigated. Safe investments, particularly those that function in the money market like Treasury bills and commercial papers would also be great as they would be able to keep investments above inflation rates while also being extremely safe.

Ideally, a higher percentage of the portfolio should be allocated to fixed income securities as opposed to equity investments.

This strategy is the best for those who have very low risk appetite, those who have made too many investment losses and are now almost discouraged, those who in no way want to threaten their investment capitals, and those who don’t mind limiting their earnings by maintaining this level of safety.

It is for those who want to be cautious and very careful so as not to experience avoidable losses.

Written by Lawretta Egba