A defensive investment strategy is an important method of portfolio allocation and management it focuses on minimizing the risk of losing principal. A defensive investment strategy promotes regular portfolio rebalancing to maintain an asset allocation. It also involves buying high-quality, short-maturity bonds, holding cash and cash equivalents and, many more in markets. Such strategies are introduced to protect investors against particular losses from major market downturns.
The Investment Strategy
Defensive investment strategies are designed in such a way that they can deliver protection first and modest growth second. With an offensive investment strategy, in contrast, an investor tries to take advantage of a rising market by purchasing securities. An offensive strategy may also develop options trading and margin trading. Both offensive and defensive investment strategies needed active management, so they may have higher investment fees and tax liabilities. In balanced investment strategy, it combines items or tricks of both the defensive and offensive strategies.
How to invest in Defensive Investment Strategy
Investments in short-maturity bonds, such as Treasury notes and blue-chip stocks are strong tactics for a defensive investment strategy. Even when buying stocks, a defensive portfolio manager will suggest to large, established names with good track records. Today, the portfolio manager is more likely to lean towards exchange-traded funds that act as market indices, as these offer facilities of all the established stocks in one investment.
A portfolio manager who is practising a defensive strategy can hold a good amount of cash and cash equivalents, such as Treasury bills and commercial paper can also help to protect the portfolio in down markets. However, keeping too much in cash and cash equivalents may arise many types of questions. As everything comes with pros and cons.