When the stock market is volatile and unpredictable, it’s expected to be concerned about the impact it might have on your portfolio. Market volatility can put undue pressure on your net worth, which impacts your sleep and the pursuit of your financial goals.
As experienced wealth managers in Paramus, New Jersey, one tactic that we recommend for high-income earners nearing retirement is to consider allocating more of their assets to a defensive strategy – either short-term or long-term. This approach can help shield your portfolio by helping to reduce risk and focusing more on capital preservation.
Before embracing any alternative investment strategy, it’s essential to have a clear understanding of its benefits and limitations. A defensive investment strategy is no different—it has its advantages, potential drawbacks, and timing considerations that must be considered to determine when and if it would be most effective for your financial situation, goals, and timeline.
What is a Defensive Investment Strategy?
At its core, defensive investing is a method you can use to help reduce the risk of significant losses on your portfolio during down markets. Think of it as building a financial wall around your principal investments, with the dual objectives of safeguarding your capital and capturing steady returns.
Integra Tip: One of your biggest risks is not stock market volatility. It is a failure to pursue financial goals that are important to you. For example, retire when you want to and live the way you want to.
This approach appeals to high-income earners closer to retirement because they may have less time to recover from down markets. A defensive investment strategy offers preservation and stability, but it may also sacrifice potential growth and face challenges related to inflation and diversification.
This strategy is as it sounds: Playing defense during periods of uncertainty in down markets.
Rather than taking an aggressive stance to capture substantial returns—usually accompanied by increased risk—a defensive strategy’s primary focus is capital preservation.
A Look at Defensive Investments
Investments aimed at being more defensive typically yield steadier returns over the long term. They’re often seen as reduced-risk options, making them an attractive choice if your focus is the preservation of your current assets.
Examples of defensive investments can include:
- Short-term Treasury bonds.
- Exchange Traded Funds (ETFs) are designed to track the performance of major market indices, providing diversified portfolios without the volatility of individual securities.
- Stocks from well-established, financially stable, higher dividend-paying companies—frequently referred to as blue-chip stocks—are recognized for their reduced volatility.
- Stocks that regularly distribute dividends add a consistent income stream to the stability of your investment.
- Cash, money market accounts, T-bills, and certificates of deposit are frequent holdings in more conservative portfolios.
Integra Tip: A core strategy for various market conditions is to generate a rate of return that seeks to exceed the inflation rate – which helps preserve the purchasing power of your assets.
Defensive Investment Considerations
Like any investment strategy, the advantages and disadvantages should be weighed before you take action. It’s crucial to align your investment approach with your financial objectives and risk tolerance.
Pros of Defensive Investment Strategy:
- It can provide a stable and predictable investment path, helping to reduce the impact of market volatility.
- Defensive assets like bonds and dividend stocks can generate consistent income, possibly suitable for risk-averse investors.
- This strategy can help reduce exposure to economic uncertainties, providing potentially increased financial confidence.
- Defensive investments often align with long-term financial goals, making them potentially suitable for retirement planning.
Cons of Defensive Investment Strategy:
- Defensive investments may yield lower returns than aggressive alternatives, potentially hindering wealth accumulation.
- Focusing on defensive assets may need to catch up with inflation, eroding purchasing power over time.
- By avoiding potentially riskier assets, investors may miss out on potential investments with higher returns.
- Bond defensive portfolios can be vulnerable to interest rate increases, potentially hurting your returns.
- Diversification Challenges: Excessive reliance on defensive assets may lead to a lack of portfolio diversification.
Reasons to Deploy a Defensive Investment Strategy
Many factors can impact your decision to adopt a more defensive investment strategy. Remember, the timing and reasons for making changes to your portfolio should align with your current circumstances and long-term financial objectives based on your tolerance for risk.
- One of the foremost reasons to deploy a defensive investment strategy is to potentially protect your hard-earned capital. By shifting towards conservative investments during uncertain times, you can seek to reduce your potential losses.
- In times of increased market volatility, in our opinion, it makes sense to adopt a defensive approach. These indicators include rising unemployment rates or declining GDP growth. This can help shield your portfolio from abrupt market fluctuations and help to reduce the impact of downturns.
- Defensive strategies often involve diversifying your investments across different asset classes, such as bonds and dividend-paying stocks. Diversification can help provide a stable and predictable return on your investments.
- Personal financial circumstances can also influence the timing of deploying a defensive strategy. For instance, if you’re approaching retirement or need to access your investments for a significant life event, transitioning to a defensive stance can help balance your financial goals and your means.
The Importance of Working with a Fiduciary Financial Advisor, in Advisory Relationships, in Paramus, NJ
Managing your finances may seem daunting sometimes, but you don’t have to face it alone. Our wealth managers at Integra can serve as financial advocates, understanding and addressing many facets of your current and future financial lives.
At Integra Wealth Management, we recognize accumulating, preserving, and distributing wealth extends far beyond choosing suitable investments. We believe in taking a holistic approach, meaning we don’t just look at the numbers on your statement. We look at all aspects of your personal and financial circumstances. We also consider your legacy and charitable aspirations to help ensure a plan that’s as broad in scope as your vision for the future and beyond.
Rich Dragotta, the founder of Integra Wealth Management, sums it up best:
“When it comes to personal finance, most people come up with the answer without having the right strategy. As wealth managers, our role is developing a comprehensive strategy that helps our clients pursue their financial goals.”
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Stock investing includes risks, including fluctuating prices and loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.
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