What is defensive investing and how do you do it?
There are many kinds of investors. There are, for example, some investors who dare to take a little more risk to get a higher return, but there are also investors who focus a little more on limiting the investment risk. If you engage in defensive investment, you fall under the latter group. Would you like to know how you can invest defensively yourself? In this article we discuss the best way to build a defensive investment portfolio.
What is defensive investing?
If you invest defensively, you are well aware of the various risks involved in investing. You do want to make a profit on your investments, but you avoid the riskier investment products. Even if these investments can bring you substantial profits. You simply make the safer choices, even if these choices give you less return than the risky investment choices.
Someone who invests defensively is also called a defensive investor. Someone who is prepared to take a little more risk for a higher profit is called an offensive investor. An offensive investor focuses less on the risks of an investment product and more on the return of an investment.
How can you invest defensively yourself?
Do you consider stability and wealth preservation to be more important than growth and returns? In that case, defensive investing might be right for you! There are several ways in which you can invest defensively. We discuss some popular options in this article.
Investing in an index fund
You can use an index fund to invest defensively. You can easily buy an index fund or ETF on the stock exchange. An index fund or ETF tracks a basket of shares listed on a certain stock exchange. This allows you to spread the risks over a selection of shares, which means that your risks are lower, and you still benefit from market developments.
If you also want to invest (periodically) in an index fund, it is best to open an account with DEGIRO. At DEGIRO, you do not pay any buy & sell costs when you buy ETFs that are listed in the core selection. Use the button below to directly open an account with DEGIRO:
Investing in defensive shares
You can also choose to specifically buy the more defensive shares. Defensive shares are shares that perform reasonably well under all economic conditions. These are shares in stable, large companies that have already built up a strong position. When you buy defensive shares, you don’t have to expect miracles: because the company is already this big, the price will often not rise sharply. Nevertheless, you can often enjoy a stable dividend which allows you to build up a nice income with defensive shares.
If you want to invest defensively by buying shares yourself, it is best to do so at a party where you do not pay high commissions. At eToro, you do not pay set commissions when you buy stocks, making this the perfect option:Your capital is at risk. Other fees apply. For more information, visit etoro.com/trading/fees.
Investing in bonds
Bonds, too, are often chosen by defensive investors. Stock market wisdom suggests that you should buy a percentage of bonds equal to your age. Bonds give you a fixed, stable income stream and if the underlying party does not go bankrupt, you simply receive the amount of your investment back at the end of the term.
However, when interest rates are low, it is difficult to achieve a favourable return with bonds.
A savings account with more interest
A last option for the investor who likes to take less risk is to save money at a higher interest rate. With Raisin, you can put your money on a deposit at higher interest rates. The website works together with foreign banks, all of which are covered by the deposit guarantee scheme. As a result, you can still achieve a positive return even if a bank collapses. Use the button below to immediately compare where you can open a savings account with a higher interest rate:
How do you draw up a defensive investment strategy?
A defensive investment strategy always focuses on security and stability. Achieving returns is a secondary objective.
When you want to invest defensively, you only invest in low-risk investment products. These are, for example, (state) bonds with a good creditworthiness and a short maturity. So-called blue-chip shares in large, stable companies can also be used within a defensive investment portfolio.
A defensive investor mainly holds cash positions when the market falls. In this way, he avoids large losses on the stock market. Moreover, as a defensive investor, you can use a stop loss: in this way you prevent a large part of your money from being lost when the market falls.
Risk diversification is also particularly important for a defensive investment strategy. You can spread your investments over different investment products, regions and sectors. Moreover, by stepping in at different points, you avoid entering at the peak of the market.
Shares with a low beta are particularly interesting when you want to invest defensively: these are shares that are barely affected by changes in the market.
Where can you invest defensively?
Defensive investment can be done at a so-called broker. A broker is a party that makes it possible to invest in, for example, shares. Before you can invest, you need to have an account with a broker. We have created a clear overview with which you can quickly select a good broker. Use the button below to compare the different brokers directly with each other:
What are the advantages of defensive investing?
There are advantages to defensive investments. As a defensive investor, for example, you are less likely to make a loss than an offensive investor, simply because you take less risk. It is not excluded that you may make a loss, but because of your cautious investment behaviour, the chance of loss is smaller.
In addition, you can achieve a good return, even if you invest defensively. In the long term, in any case, you earn more than people who leave their money in their savings account, because the savings interest rate is very low at the moment. If you invest defensively, you let your assets work for you in a sensible and fairly safe way.
Shares or bonds?
Many people see equities as offensive investment and bonds as defensive investment. At some level this is true. On average, shares are more volatile and riskier, but they also promise higher returns. At the same time, bonds often pay out a fixed interest rate and at the end of the term you get your money back.
Nevertheless, shares need not always be less risky than bonds. There are also very stable shares and very risky bonds. Of course, when you buy bonds from a company that is almost bankrupt, this brings with it greater risks. It is therefore important to build a good balance within your portfolio between risky and less risky securities.
Is a defensive investment something for me?
Before you start investing, it is good to determine what kind of investor you are. Do you find it exciting to take risks and do you prefer to invest as safely and cautiously as possible? In that case, you are a defensive investor. On the contrary, do you find it exciting to take risks and are you prepared to take occasional losses to make higher profits? Then you are an offensive investor.
Ask yourself which way of investing suits you. Are you more focused on profit than on the risks of an investment product? In that case, you are not a defensive investor, but an offensive investor. If you focus more on the risks and limiting the risks of investing, then you are a defensive investor.
Starting with defensive investing
Are you a defensive investor? Then you are looking for a suitable defensive investment strategy. You use this strategy to make the right investment decisions as a defensive investor. There are various defensive investment strategies, so there is always a strategy that suits you.
Do you want to invest money in an investment fund? Then you are looking for a defensive investment fund. This fund has a strategy that suits the defensive investor, in other words, your preferred method of investing.
Are you curious what investment strategies exist? Read our article with 10 investment strategies that you can apply immediately: