Defensive investment strategies have a goal in common — to help a portfolio better weather an economic downturn and/or bouts of market volatility. But there are some key differences in the details, including the specific criteria by which particular stocks are selected. If you are nearing retirement or just have a more conservative risk tolerance, one of these defensive strategies may help you manage risk without giving up exposure to the growth potential of stocks as an asset class.
1. Tilt toward value
Growth and value are opposite investment styles that tend to perform differently under different market conditions. Value stocks are associated with companies that appear to be undervalued by the market or are in an industry that is currently out of favor. These stocks may be priced lower than might be expected in relation to their earnings, assets, or growth potential, but the broader market is expected to eventually recognize the company’s full potential.
Established companies are more likely than younger companies to be considered value stocks. These firms might be more conservative with spending and may emphasize paying dividends over reinvesting profits. Unlike value stocks, growth stocks may be priced higher in relation to current earnings or assets, so investors are essentially paying a premium for growth potential. This is one reason why growth stocks are typically considered higher risk than value stocks.
2. Temper volatility
All stocks are volatile to some degree, but some have been less volatile historically than others. Certain mutual funds and exchange-traded funds (ETFs) labeled “minimum volatility” or “low volatility” are constructed with an eye toward managing risk.
One commonly used measure of a stock or stock fund’s volatility is its beta, which is typically published with other information about an investment. The stock market as a whole (represented by the S&P 500 Index) is generally considered to have a beta of 1.0. In theory, an investment with a beta of 0.8 might experience only 80% of market gains during an upswing and only 80% of losses during a downswing — and thus would have less ground to regain when the market turns upward again.
3. Seek out dividends
Whereas stock prices are often unpredictable and may be influenced by factors that do not reflect a company’s fiscal strength (or weakness), dividend payments tend to be steadier and more directly reflect a company’s financial position. Comparing current dividend yields, and whether companies have a history of dividend increases, can be helpful in deciding whether to invest in a stock or a stock fund.
Dividend stocks tend to be sensitive to interest rate changes, so there are times when they can either drag down or help boost portfolio performance. For example, when rates fall, the lower yields on fixed-income investments could make the yield on dividend stocks seem more attractive. The flip side is that dividend-paying stocks may not have as much growth potential as non-dividend payers.
The return and principal value of all investments fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investing in dividends is a long-term commitment. The amount of a company’s dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated. Low-volatility funds vary widely in their objectives and strategies. There is no guarantee that they will maintain a more conservative level of risk, especially during extreme market conditions.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
