What Is a Defensive Investment Strategy?

What Is a Defensive Investment Strategy?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A defensive investment strategy is a method of investment that aims to protect your wealth over the long term. While the main advantage is that you’re less likely to lose a significant portion of your investment, this conservative approach generally results in slower capital growth. The strategy primarily involves investing in stable, low-risk stocks and bonds of well-established, financially sound companies known as “blue chip” companies. These companies usually have a history of paying regular dividends, which can provide a steady income for investors.

Related Questions

1. What are some examples of defensive investments?

Some examples of defensive investments include blue-chip stocks, government bonds, utility stocks, and high dividend yield stocks. These assets tend to remain stable during volatile market conditions and offer a steady return on investment.

2. What are the pros and cons of a defensive investment strategy?

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The key advantage is the relative safety of your investment, which is less likely to lose value compared to riskier strategies. However, the potential for rapid capital growth is lower, and returns may not keep up with inflation.

3. How does a defensive investment strategy differ from an aggressive strategy?

An aggressive investment strategy invests in high-risk, high-reward assets with the primary aim of rapid growth. In contrast, a defensive strategy focuses on preserving capital through investments in low-risk, stable assets.

4. As a beginner, should I adopt a defensive investment strategy?

For beginners, a defensive strategy can be a good way to get started as it helps safeguard your initial capital. However, it’s best to consider your own risk tolerance, financial goals, and time horizon before deciding on an investment strategy.

5. Are mutual funds considered a defensive investment?

Not all mutual funds are defensive investments. It depends on the specific types of securities the fund components. For example, a mutual fund comprising of blue-chip stocks or government bonds can be considered defensive.