Market jitters? Consider a defensive investment strategy

Market jitters? Consider a defensive investment strategy

Written by: Cynthia Yang

Certain investments, such as stocks, are almost always volatile. But you may feel as though you need a particularly strong stomach these days. Although stocks have historically provided higher long-term returns than other major asset classes (such as bonds and cash), past performance does not guarantee future results. Depending on an investor’s time horizon, financial goals, and risk tolerance, they may be appropriate for retirement accounts that won’t be needed for a decade or more. But if you’re closer to retirement or simply require greater peace of mind, here are several defensive investing strategies you might want to consider — keeping in mind that no investment strategy can eliminate market risk or prevent losses.

Spread risk around

Even those who are bullish on the market and relatively risk-tolerant should consider diversifying their portfolios across different asset classes, industries, and geographies. But if you’re risk-averse, diversification may be particularly important.

Whether you mainly invest directly in securities or access the market via mutual or exchange-traded funds, decide how you want to allocate percentages in stocks, bonds, and cash (money-market accounts). You may also want some international exposure and to invest in such areas as real estate and commodities.

If you buy funds, pay attention to their sector allocations and the number and weighting of individual holdings. More diversified funds may help reduce certain types of short-term risk, although they remain subject to market fluctuations. This is because different types of securities tend to move in different directions. So, if some types of investments are falling in value, others may be rising at the same time, which may help reduce overall portfolio volatility.

Buy on the cheap

Value investing, or buying “cheap” stocks, is a classic strategy made famous by such investing icons as Warren Buffett and Benjamin Graham. Value investors look for companies priced low relative to their business fundamentals and such investment ratios as price-to-earnings. Usually these stocks have reacted negatively to some form of bad news, such as poor quarterly earnings, or are depressed because the general market has declined and punished stocks across the board.

Because they’re relatively inexpensive, value stocks may not decline as sharply as higher-priced stocks during broader market downturns, although they remain subject to market risk. But most value strategists are in it for the long term. There’s a common misconception that buying bargain-priced stocks leads to immediate returns. In fact, it can take years before a value stock becomes what its investors consider fully valued.

Roll with economic cycles

Even experts have trouble predicting recessions. But certain indicators frequently coincide with economic downturns. While these measures are widely followed, no single indicator can reliably predict market movements or economic shifts. For example, many professionals suggest caution when bond markets exhibit a moderate or flat yield curve and widening credit spreads. Another red flag can be a Purchasing Managers Index reading below 50, indicating that the manufacturing sector is contracting.

If the economic cycle seems to be shifting into lower-growth territory, some investors favor consumer staples (think toothpaste and soap companies), utilities and health care stocks. These sectors may offer goods and services that people buy regardless of the economic climate. Also, because gold is often perceived as having intrinsic value, it has historically been viewed as a defensive asset during periods of economic uncertainty. However, so-called defensive sectors and assets — including gold — remain subject to market and sector-specific risks, and gold in particular can experience significant volatility and does not guarantee protection during downturns.

In the same scenario, cyclical investors may ease up on consumer discretionary (such as travel and luxury goods) stocks, technology and biotech (which tend to be heavily leveraged) and companies in the financial services and energy industries. Much depends on specific indicators, such as inflation and interest rates.

Best for most

Although reallocating investment portfolio holdings can possibly help you reduce short-term volatility, attempting to “time” the market can be difficult to execute consistently. For most investors — and especially those with less investing expertise — building a diversified portfolio that reflects your financial goals, time horizon, risk tolerance, and other personal factors is a sound long-term approach.

It may make sense to rebalance portfolio allocations when there are major market changes. For example, if bonds do particularly well one year, a bond fund may grow disproportionately to other holdings and it probably makes sense to rebalance your portfolio. Contact us for help building a diversified portfolio and to discuss such issues as volatility and rebalancing.

Important Disclosures

Investment advisory services offered through Planned Financial Services, LLC, dba Return on Life Wealth Partners, an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.

The views expressed are current as of the date of publication and are subject to change without notice. The strategies and concepts discussed are provided for informational purposes only and may not be suitable for all individuals. This material is not intended as specific investment, tax, or financial planning advice.

All investing involves risk, including the possible loss of principal. Diversification and asset allocation strategies do not ensure a profit or protect against loss in declining markets. Past performance does not guarantee future results.

For more information about our services and regulatory disclosures, please see our Form ADV at www.returnonlifewealth.com/additional-disclosures.