Defensive stocks - Characteristic & Role of Defensive Stock in a Portfolio (2024)

FAQs

What are the characteristics of defensive stocks? ›

Defensive stocks are those that tend to provide stable earnings and consistent returns, even during an economic downturn. Shares of well-established companies in the consumer staples, utilities, and healthcare sectors are common examples of defensive stocks.

A defensive portfolio focuses on consumer staples that are impervious to downturns. An income portfolio concentrates on shareholder distributions. The speculative portfolio is not for the faint-hearted. The hybrid portfolio diversifies across asset classes.

These stocks do not get affected by economic cycles; therefore, they are also referred to as non-cyclical stocks. Despite these stocks barely outperforming the index of the market, investors tend to invest in defensive stock companies as they come in handy even during turbulent times in the market such as a recession.

Reduced volatility: Defensive investments are generally less sensitive to market fluctuations, making them less likely to experience significant price swings. This can make them a more stable option for investors who are risk-averse or have a low tolerance for stock volatility.

Defensive investing typically involves holding a diversified portfolio of asset classes such as lower-risk cash and bonds, plus equities, along with assets whose performance is typically less correlated to stock market movements – such as gold.

Always have at least 33% of the portfolio invested in defensive shares.

Also known as “non-cyclical stocks,” defensive stocks protect portfolios against losses. Defensive investments are typically established companies that serve basic human needs or prioritized desires, offering goods and services that are indispensable to consumers and therefore always remain in demand.

What is the purpose of defensive? ›

o The Purpose of Defensive Action:

is to retain or control terrain, gain time, develop more favorable action, or to economize forces to allow the concentration of forces elsewhere.

Identifying Defensive Stocks

Beta measures a stock's volatility in relation to the overall market. Defensive stocks usually come with a low beta because they are less affected by market swings. Defensive stocks also traditionally come from sectors that produce necessities or consumer staples.

Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks. On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market.

What are defensive assets? Defensive assets provide long-term stable returns with lower volatility. Examples of defensive assets are fixed interest investment options such as debentures, bonds and bank bills and cash investment options which include bank bills and bank deposits.

While cash, gold and Treasuries are all considered defensive asset classes, each arrives at that characteristic in a different way. Cash has historically provided stability in the form of very low volatility, along with a lower return.

Capability of Receiving Periodic Dividends - The dividend payment is the most important characteristics of a stock. The investors are largely attracted by the dividend payment capability of the company. Being a stockholder, the investors have the rights of receiving the dividend payment periodically.

Stock is made with bones, and they're the most important ingredient because they add body and richness. As the bones simmer they release collagen, which is converted into gelatin. Gelatin enables finished stock to enrich your sauces, soups, and stews. Broth, made from meat, has stronger flavor but lacks body.

A good quality company has a low net debt to equity ratio. Net debt to equity is measure by dividing the total liabilities on the balance sheet by total shareholder's equity. Stocks that have an optimal debt to equity ratio have a higher stock return than other stocks.

What are the 3 main factors that affect stock? ›

Apply the 5/25 rule

When an asset class shifts from its original target by 5%, you should rebalance it. Let's imagine that your portfolio is originally 80% stocks. But then, the actual value shifts to 75% or 85% of your portfolio makeup. Since your investment makeup moved by 5%, you would rebalance your portfolio.

In investment, the five percent rule is a philosophy that says an investor should not allocate more than five percent of their portfolio funds into one security or investment. The rule also referred to as FINRA 5% policy, applies to transactions like riskless transactions and proceed sales.

Some examples of defensive strategies include: A pricing war, in which a company commits to matching or beating a competitor on price. Adding more features to keep ahead of a competitor. Offering better service or warranties that speak to having better products.

Generally speaking, many sources say 20 to 30 stocks is an ideal range for most portfolios. It's important to strike a balance between investing in a diverse array of assets and ensuring that you have the time and resources to manage these investments.

What Is An Optimal Amount of Stocks in a Portfolio? Although the so-called “optimal amount” of stocks is a nebulous, non-universal number, many financial advisors and even mathematicians feel that somewhere between 20 and 30 stocks could be the best option.

The rule, introduced in 2018 as part of the Mifid II legislation required some firms to notify clients within 24 hours if their portfolio dropped by 10%.

Defense stocks did well in 2022, enjoying a big rally in October and far outpacing the wider stock market: the MSCI Aerospace & Defense index has seen 18.66% growth in a 12-month period. They could be a good addition to investor portfolios with the current climate.

Defensive stocks are important because they can provide stability and protect your investment portfolio during periods of market volatility or recession. During times of turmoil, defensive stocks are typically a safer bet than growth-focused companies, as they tend to be more risk averse.

Cyclical stocks are generally the opposite of defensive stocks. Cyclical stocks include discretionary companies, such as Starbucks or Nike, while defensive stocks are staples, such as Campbell Soup.

What are examples of defensive stocks? ›

Moreover, the top defensive stocks have the ability to grow their dividends. Typically, these defensive companies generate a sufficient amount of free cash flow (FCF) that can support both dividend payments and also stock buybacks.

Consumer defensive companies are engaged in the manufacturing of food, beverages, household/personal products, packaging, or tobacco. Procter & Gamble PG, PepsiCo PEP, and Costco Wholesale COST are among the largest companies in the consumer defensive index.

There are three basic defensive tasks—area defense, mobile defense, and retrograde. These apply to both the tactical and operational levels of war, although the mobile defense is more often associated with the operational level.

While defensive behaviors might help you to feel better in the short term, in the long term they generally result in you feeling worse. As you point out the flaws in the other person to avoid feeling attacked, you end up making the other person defensive as well.

The objective of a defensive business strategy is to fend off aggressive attacks. If you don't have a defensive strategy or if you fail to stop an attack, you incur a substantial problem because you put your business at risk.

A defensive investment strategy entails regular portfolio rebalancing to maintain an intended asset allocation. It also involves buying high-quality, short-maturity bonds and blue-chip stocks; diversifying across sectors and countries; placing stop loss orders; and holding cash and cash equivalents in down markets.

Bank stocks are near the middle of the risk spectrum. They can be recession-prone and are sensitive to interest rate fluctuations, just to name two major risk factors. But, like most other types of businesses, the risk associated with bank stocks can vary tremendously between companies.

Defensive stocks are favored by investors during tough economic times as companies operating in the space feel little impact of the broader economic downturn. That's because they sell products and services whose demand remains almost unchanged due to their essential nature.

An aggressive stock would be expected to experience a relatively larger positive return than the market. A defensive stock would also experience a positive return, but it would be relatively smaller than the market return.

Is oil a defensive stock? ›

Defensive stocks offer higher dividend yields. You may earn consistent returns by investing in defensive stocks, as some of them regularly pay dividends. Some defensive stocks that have paid higher dividend yields in the past are ITC Limited, ONGC, Oil India, GAIL, Coal India, etc.

Betting on value today is a defensive trade

In general, defensive stocks tend to have a market beta of less than 1, meaning they will outperform the broader market when the index falls. In contrast, cyclical stocks tend to have a market beta of more than 1, meaning they will underperform when the index falls.

Defensive assets are generally those that aim to provide a steady and/or stable income stream. These assets generally have lower investment risk, with more stable returns in the short term, but also generally have the potential for lower returns over the longer term.

Gold and gold mining stocks have historically been sought by investors as a defensive play during times of economic uncertainty, one of the biggest reasons being that these assets have had a low to negative correlation to the broader equities market.

Cash is a defensive asset, as it's expected to maintain the value of the principal investment, but has relatively low returns.

There are three main defensive sectors: Utilities, Consumer Staples, and Health Care. Utilities: Water, gas, and electric utilities are needed in all phases of the business cycle. Utilities are usually classified as US Large Value.

Some of the most common types of safe assets historically include real estate property, cash, Treasury bills, money market funds, and U.S. Treasuries mutual funds. The safest assets are known as risk-free assets, such as sovereign debt instruments issued by governments of developed countries.

As a defensive asset, gold can be considered a secure investment, even in comparison to ETFs. This is because gold investing may provide systemic risk protection. Systemic risk is the risk associated with the collapse of an entire system. In this case, it would be the collapse of an entire financial system or market.

A feature of defensive battle is a striving to regain the initiative from the attacking enemy. The defending commander uses the characteristics of the defense—disruption, flexibility, mass and concentration, preparation, and security—to help accomplish that task.

Defensive investing typically involves holding a diversified portfolio of asset classes such as lower-risk cash and bonds, plus equities, along with assets whose performance is typically less correlated to stock market movements – such as gold.

How do you tell if a stock is aggressive or defensive? ›

A company stock with beta greater than one is called an aggressive stock. If beta is less than one, the returns on the company stock are less volatile than the market return. A company stock with beta less than one is called a defensive stock.

The characteristics of defensive operations are prepared positions, security, disruption, mass, concentration, and flexibility.

The three types of defensive operations are the mobile defense, area defense, and retrograde. All apply at both the tactical and operational levels of war. Mobile defenses orient on destroying attacking forces by permitting the enemy to advance into a position that exposes him to counterattack.

These five principles are: Delay, Compactness, Depth, Balance and Control/Restraint.

There are two main types of defensive strategies that an opposing team can employ: Man-to-man or zone defense. The first is man-to-man. As the name suggests, you, as a defender are responsible for guarding a specific opposing player.

Types of Stock

There are four basic kinds of stock/fond: white stock (Fond Blanc), brown stock (Fond Brun), vegetable or neutral stock (Fond Maigre) and Fish Stock (Fume de Poisson). The classifications refer to the contents and method used to prepare the stock, not necessarily to color.

If they think times are going to be harder than usual, they will migrate toward defensive stocks. Defensive stocks tend to perform better than the broader market during recessions. However, during an expansion phase, they tend to perform below the market. That is attributable to their low beta or market-related risk.