Defensive Investment Strategy: A Guide To Make Money Now

Defensive Investments and Defensive Investing Explained

Today, I want to set forth a guide about defensive investment strategy. Furthermore, I want to answer 3 important questions for you.

First of all, what is a defensive investment strategy?

Secondly, who should practice defensive investing strategies?

Finally, how to become a defensive investor?

That’s our road map. So, let’s begin our journey to understand the ins and outs of defensive investment strategy.

defensive investment strategy

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

What Is A Defensive Investment Strategy?

First of all, an investment strategy is a specific approach to putting money to work. To earn a return on investment.

Furthermore, investing strategies guide investor’s decisions. And, provide a context to evaluate specific investments.

There are many other investment strategies an investor may pursue. And like the others. Today’s strategy has its unique qualities.

Specifically, a defensive investing approach seeks to reduce downside risk. Meaning the risk of losing some or all of an investor’s initial investments. While still providing for a positive return in the long term.

On the other hand, defensive investing is not risk-free. But, the risk of loss is minimized by choosing defensive investments. And using defensive investing tactics.

Who Should Practice Defensive Investing?

By nature, I am a defensive investor. So, I can speak from my first-hand experiences.

Thus, some of the traits a person who is likely to prefer defensive investing include:

  1. Low tolerance for losing money on investments
  2. Feeling uncomfortable with large swings in investment values
  3. Highly reliant on investments to cover day to day expenses
  4. Able to forgo the highest potential investment returns

Does that description sound like you? If yes. You may want to use a defensive investing strategy.

Then, the next logical question? How to go about it…

How To Become A Defensive Investor

steps to become a defensive investor

I can boil defensive investing down to 4 main steps. They are:

  1. Find, select, and buy the best defensive investments
  2. Construct those defensive assets into an investment portfolio
  3. Monitor the defensive investments you have chosen
  4. Maintain your portfolio using defensive investing techniques

Next, I would like to walk you through each of these steps in greater detail.

So if you choose, you can become a defensive investor. And build a defensive investment portfolio of your liking.

Defensive Assets Are Similar To Other Investments

We will address step 1 in my defensive investment plan shortly. Specifically, what are the various types of defensive investments?

But, before we get to specific defensive investment examples. I want to explain the bigger picture view of investment assets. Here goes…

In general, investment assets will produce income. Or, appreciate. And in the best case, provide both types of returns for an investor.

And defensive assets are no different. They can provide income, increase in value, or do both.

But the most important aspect of any investment? It is the long-term total return. Whether it comes from income or growth.

Now. Onto some of the best defensive investments. Finding them is the first step in a defensive investment strategy.

Step 1: Find And Select Defensive Investments

defensive investment portfolio

First, let me summarize some of the best defensive asset classifications:

  • Cash and cash equivalents
  • High-quality short-term and mid-term bonds
  • Defensive stocks
  • Productive real estate
  • Gold
  • Defensive mutual funds & ETFs

Now, let’s discuss each of these defensive investment options in greater detail…

Cash & Cash Equivalents

Cash may be the most defensive of all investments.

Because, choose FDIC insured saving accounts, money market accounts, or certificates of deposit. Then your money is guaranteed by the Federal Deposit Insurance Corporation (FDIC).

You are certain to get your money back. Even if the financial institution holding it goes bankrupt.

So what’s the trade-off? It is low-interest rates.

Meaning cash provides for very little return on your investment. Since interest rates are at historical lows. And are expected to stay that way for some time.

Even so, there may be good reasons to hold cash. In a defensive investment portfolio.

Those reasons include liquidity to pay bills. Or, having cash available to take advantage of investment opportunities. When those opportunities present themselves.

Finally, you can find some of the best interest rates for your cash. And have the security of FDIC insurance. By choosing an online bank. And CIT Bank is an excellent option.

You can learn more about CIT Bank here.

High-Quality Short-Term And Medium-Term Bonds

First of all, a bond is merely an “I Owe You” (IOU).

Where the bond investor provides their money to an entity. In exchange, that entity agrees to pay back the bondholder at a specific date in the future. And pay interest as the investor’s return for forking over his or her cash.

Furthermore, there are many types of bonds. And different types of entities that issue bonds.

But not all bonds are suitable for a defensive investment strategy. So, what types of bonds are defensive?

Well, for bonds to be a defensive investment, they have 2 main qualities. First, the bond issuer must have a high credit rating. Second, the bond must be of shorter duration.

Higher credit ratings mean the bond issuer has a strong financial position. And pays back its debts on time.

A shorter duration means the bond is due to mature in less than 5-6 years. Because the longer the bond issuer holds your money. The more likely something might go wrong. And the bondholder will not get paid back.

Here are some types of bonds that are suitable for a defensive investment portfolio:

  • U.S. Savings Bonds
  • U.S. Treasury Bonds
  • Investment Grade State Municipal Bonds
  • Investment Grade Corporate Bonds

But, in the current low-interest-rate environment, bonds will typically not increase in value. So, a defensive investor’s return comes mainly from the income that bonds produce.

Finally, consider defensive mutual funds. Or, an ETF holding a diversified bond portfolio. Because both are good options to consider.

The next type of investment? Defensive equities. Or, better known as stocks.

Defensive Stocks

For a defensive investment portfolio, we only want to consider the highest-quality stocks. Sometimes, they are referred to as blue-chip stocks.

Defensive Blue-Chip Stocks

Blue-chip stocks are considered an excellent long-term investment option. Historically, they have produced growth in defensive portfolios.

So now, we have our first defensive assets with the potential to increase in value. Thus, blue-chip stocks are considered appreciating assets.

Furthermore, blue-chip stocks are issued by well-known. And well-established companies.

Finally, many blue-chip stocks also pay dividends to their shareholders. Making them a defensive asset that appreciates. And, has the potential to increase in value.

Some examples of defensive blue-chip dividend-paying stocks include:

  • Apple
  • Johnson & Johnson
  • Microsoft
  • PepsiCo
  • Walmart

Consumer Defensive Stocks

Furthermore, PepsiCo is an example of a consumer defensive stock. These are companies that manufacture food, beverages, household, and personal products.

Why are companies like this considered defensive stocks? Because they produce products that never go out of style. Even during difficult economic times.

Thus, they are defensive shares. And their prices tend to hold up better than other stocks.

When the going gets tough. And the stock market goes down.

Therefore, they are a good fit. For a defensive investor’s portfolio.

Finding Defensive Stocks

Are you are interested in identifying high-quality, defensive dividend stocks? Then consider the Simply Investing Report.

I am an avid dividend stock investor. And believe the Simply Investing report to be an excellent resource.

Each month, I get dividend stock recommendations. Delivered to my in-box.

With insightful market and company analysis. With specific dividend stock recommendations for new investment dollars.

Simply Investing uses very strict stock evaluation criteria. Thus, they recommend only the most defensive shares.

You can learn more about Simply Investing here.

Okay. So far, we have only discussed financial assets. Let’s switch gears…

Next, let’s review physical assets that may be part of a defensive investment strategy. And we will start with real estate.

Real Estate Assets For Defensive Investing

example of defensive investment: real estate

Physical assets have an advantage over financial assets. What is that? Well, they tend to do better during times of inflation.

Inflation is the endless march higher of prices. For the goods and services, we buy every day.

All things being equal. When prices rise, so does the price of real estate.

In addition, the land is a valuable but limited resource. That just means they aren’t creating land on this earth anymore. It’s impossible to do so.

So land and the buildings on it tend to become more valuable over time.  On the other hand, I don’t consider one’s primary residence a defensive investment.

Although your home’s value can appreciate. It is mainly a place to live. And takes money to maintain.

Furthermore, unless you sell your home in a strong real estate market at a high price. Then find a smaller, cheaper, lower-cost place to live.

Your home is not a defensive investment. Because you are just trading dollars from one home to another.

Defensive Real Estate Investment Options

But here are some possible options to consider for real estate holdings in a defensive investment portfolio:

  • Rental properties
  • Apartment buildings
  • Commercial properties
  • Raw Land
  • Farmland

Because, when an economic crisis strikes. These types of properties tend to hold their value pretty well. And they are also asset types that produce income, in many cases.

Furthermore, farmland has become a popular investment option in recent years. Especially with the power of the internet connecting buyers with sellers.

Does investing in farmland interest you? Then be sure to check out AcreTrader.

They provide investors direct access. To investments in farmland.

Gold And Other Precious Metals

Gold is the most popular precious metal for investment purposes. And is considered a defensive investment for a couple of different reasons.

First of all, gold tends to perform well during times of severe economic and financial stress. The precise conditions when other investment assets struggle.

Furthermore, gold prices hold up well during inflationary times. When other defensive assets, like bonds, become less desirable.

So, we have talked about several defensive assets. But, what about investment funds?

Defensive Mutual Funds & Defensive ETFs

Some investors like to build their defensive investment portfolio themselves. By handpicking each investment.

But, that can be a lot of work. So, other defensive investors turn to mutual funds or exchange-traded funds (ETFs).

Or, investment management companies. To let a portfolio manager do the work.

Here’s a rundown of mutual fund and ETF options to consider for defensive investors:

Cash

We already talked about online banks to stash your cash. CIT Bank is a good option.

For a broad range of cash and cash equivalents. Offered at competitive interest rates.

Quality Bonds & Defensive Equity Funds

For high-quality bonds and defensive stocks, low-cost exchange-traded funds are a solid option.

Vanguard is my favorite source for both defensive bond funds. And quality stock funds that pay dividends.

Real Estate

On the other hand, real estate can be a bit more challenging. Because it takes time and a lot of money to buy individual properties.

So, that type of real estate investing is not for everyone. Fortunately, crowd-sourced real estate investing platforms have made real estate investing accessible.

Where these investment platforms pool money from numerous investors interested in real estate. For the attractive investment returns, they can provide.

One such option is Realty Mogul.

First of all, the platform is known for a good range of real-estate investments to select from.

Furthermore, they provide a thorough review process to produce the best investment options.

Finally, they offer reasonable investment minimums to get started.

You can learn more about Realty Mogul here.

Gold

Finally, we have gold funds. Because it’s hard to handle and store gold.

The SPDR gold trust, ticker symbol GLD, is a popular choice.  It is an ETF and holds the physical asset, gold in this case, on the defensive investor’s behalf.

What About Other Alternative Assets?

alternative defensive investments

First of all, alternative assets are investments that do not fall into the traditional assets classifications. Specifically cash, bonds, or stocks.

Normally, they are added to an investment portfolio. For the diversification they provide.

But, you may have noticed that I have sprinkled in just a few examples. Of alternative investment assets in the discussion.

However, I stuck with the most mainstream options. Real estate and gold come to mind immediately.

In contrast, there are other alternative assets I have intentionally not discussed. That some investors believe should be part of a defensive investing strategy.

Here are some examples of other possible defensive alternative investments:

Bear market funds: These types of defensive funds are specifically designed to go up. When the stock market and other assets are going down.

Commodities: A commodity is a basic good, raw material, or agricultural product. Such as oil, copper, soybeans, and cattle.

Private investments: Like private equity, venture capital, and peer-to-peer loans.

Collectables: Such as coins, luxury goods, and art investments.

So, why have I left these out?

Well, I think these assets are too complex. And, too risky for the average defensive investor like me. And maybe you too?

It’s just my opinion. Other investors may disagree.

And that’s okay. But, I wanted to address the topic.

So, now we have covered the various types of defensive investments. And defensive funds that hold them.

Next, let’s talk about using defensive investment tactics. When constructing and maintaining an investment portfolio.

Step 2: Construct A Defensive Investment Strategy Portfolio

types of defensive investments

Defensive investing is not just about selecting defensive assets. Because using best practices when constructing a defensive investment portfolio is important too.

Here are 4 specific investment points to consider:

Determine Your Asset Allocation

First of all, asset allocation is the act of dividing up your assets. Between the types of defensive investments we just discussed.

Furthermore, asset allocation can have a big influence.

Consider these 2 extreme examples…

Defensive investor #1 chooses to put all of her investments in cash and cash equivalents. This is the most defensive asset allocation a portfolio can have.

It is virtually insulated from volatility and any risk of loss. On the other hand, the portfolio is guaranteed to deliver very low investment returns.

In contrast, defensive investor #2 chooses to put 100% of her assets in blue-chip stocks. This approach has excellent prospects for income, growth, and total investment returns.

But, the portfolio is much less defensive than investor #1. Because it will be subject to stock market volatility. And may experience wide swings in value.

So, you may ask. What does a defensive portfolio look like as it relates to asset allocation?

That is a fair question. Let me show you.

Defensive Investment Strategy Portfolio Model

Defensive AssetAsset Allocation
Cash5%
Bonds50%
Stocks30%
Real Estate10%
Gold5%
Total100%
Possible defensive portfolio asset allocation

A portfolio like the one shown above. Can be constructed with hand-picked individual holdings. Or, defensive funds and good low-cost ETFs.

But there’s more beyond asset allocation. To play defense with a portfolio…

Stay Diversified Within Asset Classes

Make sure you diversify holdings within an asset class. For example, in the model portfolio, we have a 50% allocation to bonds. And a 30% allocation to stocks.

Good diversification practices suggest filling out these allocations with several holdings. Either diversified funds. Or, 20+ bonds issued by different entities. And, 20-25 individual blue-chip stocks.

Keep Your Defensive Investment Strategy Costs Low

By choosing a defensive investment strategy, investment returns will usually be lower. When compared to more aggressive investment strategies.

So, it’s critical to keep investment costs low. Do so by selecting low-cost ETFs and trading stocks, bonds, and ETFs for free.

I use the Webull app to buy and sell investments. Webull is fast to sign up. And easy to use. Finally. Webull does not charge commissions on trades.

You can learn more about Webull here.

Minimize Taxes

Defensive investing is a long-term strategy. So, choose your investments wisely. Buy them. And hold them for the long term.

Limiting trading will also keep your taxes lower. Because keeping more of the money you make is very important.

Here is another suggestion to reduce the drag of taxes on your defensive portfolio. Specifically, hold your investments in an Individual Retirement Account (IRA).

Have you been meaning to open an IRA? To save for financial security in your retirement years?

Well, there is no reason to delay. Because M1 Finance is a great choice for IRA accounts.

It’s easy to sign up. Also, M1 accounts are free to open. And offer zero-commission investment transactions. Plus, some great financial tools.

You can learn more about M1 Finance here.

Next up. Our 3rd step to becoming a successful defensive investor…

Step 3: Monitor Your Defensive Investments

monitoring defensive stocks

At least once a year review the holdings in your portfolio. Go through them one by one. And ask yourself these important questions…

Would I still buy this investment today?

Are the reasons I selected this investment still valid?

Are the fundamentals that caused me to invest still in place?

Is the holding contributing favorably to my diversification?

If you answer no to 1 or more of these questions. Then, it may be time to consider selling of all or a part of the asset.

And now, our final step for today…

Step 4: Maintain Your Defensive Investment Strategy Portfolio

Here are some additional defensive investing tactics. When it comes to building and maintaining a defensive investment portfolio.

Invest & Reinvest Regularly

Add new funds regularly. And, reinvest all interest and dividends received back into the portfolio.

Investing and reinvesting consistently are excellent practices for any investor. But especially for a defensive investor.

Buying defensive assets consistently means you benefit from dollar-cost averaging (DCA). This just means as asset prices fluctuate you benefit in two ways.

First, buying more defensive shares when prices are lower. Second, buying less when prices are higher.

Stick With Defensive Investing Tactics Long Term

Defensive investing is a long-term strategy. Don’t get involved if you can’t stick with it for at least 5 years. Preferably, longer.

Sticking with it is usually not a problem when stock markets and asset prices are falling. Specifically during times of economic stress and difficulty.

Why? Because the defensive investor is perfectly positioned for this type of environment.

A defensive portfolio will go down. But not by nearly as much as an aggressive investor’s portfolio.

The challenge comes when stocks and other asset prices are rising rapidly. And higher-risk investments are performing well.

This is when a defensive investor must hold his or her ground. Because it is the worst time to bail out. And move to higher-risk assets.

What happens? Well, the defensive investor sells his assets at low prices. And buys riskier assets with greater return potential.  But, buys them at high prices.

It is the same as chasing hot investments. And, it is a bad recipe. Ripe for losing money.

Check Asset Allocation & Rebalance

We already talked about asset allocation. And the importance of constructing a defensive investment portfolio with asset allocation in mind.

So, don’t forget about it. Because asset prices will change.

Some investments will do well. Some will not do as well.

Thus, review your defensive portfolio annually. Or, maybe twice per year. And bring it back to your target asset allocation.

And either through selling or adding new funds. Rebalance back to the asset allocation that makes the most sense for investment objectives. And risk tolerance.

Here is the easiest way to review your defensive investments. And, keep an eye on asset allocation. It is Personal Capital.

Personal Capital is an excellent online tool to see all of your investments in one place. And as a bonus, manage your spending and expenses too.

Best of all, Personal Capital is free to sign up and use. You can learn more about Personal Capital here.

Consider Stop Loss-Orders

Another tactic some defensive investors deploy is utilizing stop-loss orders.

A stop-loss order is an order placed with a broker. To sell a specific security. Once it reaches a certain price.

So, in times of falling prices. A stop-loss acts just as its name implies.

It stops the losses by selling at a predetermined price.  That the investor has set as a floor.

Most noteworthy, I’m not a big fan of stop-losses. I have never used them in my years of investing.

In my opinion, it’s a technique that leads an investor to sell low. And then be left with a decision about buying back into the holding and when.

On the other hand, I say, choose good investments. Buy and hold for the long-term.

And make conscious and intelligent selling decisions. As part of a routine investment and portfolio review process.

Okay. One last topic. And then I will wrap up.

Pros And Cons Of A Defensive Investment Strategy

pros and cons of defensive investing

As I researched and wrote this article. And pondered my own experiences as a defensive investor. A few pros and cons of defensive investing rose to the surface.

So, for anyone considering becoming a defensive investor. And, implementing a defensive investment strategy. First, consider these advantages and disadvantages…

Advantages Of Defensive Investing

  • Limits investment volatility
  • Provides a strategy for conservative investors
  • Provides many types of defensive investment options
  • Is easy to implement through defensive ETFs and funds

Disadvantages Of Defensive Investing

  • Limits opportunity to earn higher investment returns
  • Does not eliminate the potential for losses
  • It may not be suitable for investors with long time horizons
  • Exposure to bailing out when investments underperform

Okay. That’s all for today. It’s time to wrap it up with a summary

Defensive Investment Strategy: Summary

First of all, a defensive investment approach seeks to reduce the risk of loss. And, limit portfolio volatility.

It’s done by investing in defensive assets. And, constructing and maintaining a defensive investment portfolio.

Furthermore, the types of defensive investments include:

  • Cash and cash equivalents
  • High-quality short-term and mid-term bonds
  • Defensive stocks
  • Productive real estate
  • Gold
  • Defensive mutual funds & ETFs

Finally, an investor can implement a defensive investment strategy by following these 4 steps:

  1. Find, select, and buy the best defensive investments
  2. Construct those defensive assets into an investment portfolio
  3. Monitor the defensive investments that  have been chosen
  4. Maintain the portfolio using defensive investing techniques

More Reading About Defensive Investment Strategies

You might also like these investing and investment-related articles:

My Favorite Defensive Investment Strategy Resources

Throughout the article, I mentioned several investing and finance resources. Perfect for a defensive investor.

They are summarized here for your convenience. Best of all, most are free to sign up and use. Or, offered at a very low price.

conclusions about conservative investing

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

A Guide To Defensive Investment Strategy