October 27, 2022
The stock market has been in undeniable turmoil thus far throughout 2022, with indices across the board suffering substantial losses at the hands of inflation, rising rates, slowing growth, bad earnings, or even international conflict. We’ve no shortage of reason for fear, and fear we’ve had.
The S&P 500 remains down over 16% YTD, while its accompanying indexes like the Dow Jones and the Nasdaq have each taken 12% and 25% losses respectively, putting us within range of bear market territory, and overall sentiment in the basement.
Now more than ever, investors are likely searching for a way to curtail losses and reduce the risk held within their portfolios, and so many are subsequently turning to defensive stocks in hopes of some relief.
Wait, what are defensive stocks?
When trying to define defensive stocks, it might help to make a sports analogy or two to help the concept resonate. Think of a football team’s defense, or particularly a football team with a really strong defense. What’s their goal? What are they good at?
The primary function of a good defense is to stop the opposing team from scoring as much as possible, even allowing 0 points in the best case scenario, and can score points too if they force a turnover and capitalize on that.
Simply put, a stock that’s defensive in nature is one that’s tend to do better than others in an overall bearish environment.
Relative to our analogy, defensive stocks are supposed to be good at preventing losses from scoring on your portfolio, and even helping you score a little too if they can get those metaphorical turnovers in the form of solid returns, low volatility and dividends.
Characteristics of defensive stocks
A defensive stock is a stock that is less likely to be impacted by market conditions and might be less volatile than growth stocks in a bearish market and provide a higher level of stability.
Some of the characteristics of defensive stocks are
- They have low P/E ratios
- They have low beta
- They pay a dividend
- They have high cash levels
- They’re well-established companies with a past, present, and future.
Keep in mind nothing is guaranteed. There were plenty of household names like Blockbuster that are not around anymore.
Crafting your own defensive strategy
The stock market is always in a state of flux, and we just so happen to be in one of the most volatile periods of that right now. So, one of the keys to success in environments like these is to be able to identify which stocks will be able to withstand a more volatile, bearish market more so than others.
Not every investor will want to defend the same though, so it’s important to identify your own preferences, needs, and financial situation before just buying into the first recommendation that pops up for defensive stocks.
Some investors might seek good returns from businesses that thrive in economic downtrends, whereas others might prefer a stock that provides a high dividend yield and just holds steady during times of chaos.
Ultimately, the defensive strategy you choose should be one that suits you, and something that you can comfortably live with the results of, knowing you made a sound decision.