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How Defensive Stocks Can Help You During Uncertain Times

·5 min read
defensive stocks
defensive stocks

In uncertain economic times, many investors shift their portfolios to a defensive posture. These moves help to preserve capital and buy stocks that perform better in a recessionary environment. Understanding what defensive stocks are and what industries they fall into can help you make smarter investment decisions. You can also work with a financial advisor who can help you create a financial plan for your situation to see where, if at all, these stocks fit in.

What Are Defensive Stocks?

A defensive stock is an investment that provides consistent dividends and returns in every type of market. While these stocks may lag the overall market during growth periods, they provide a steady return when the economy stalls or dips into recession. Many of these well-established businesses have mature, cash cow products that are the staples of consumer spending.

Which Industries Have Defensive Stocks?

defensive stocks
defensive stocks

When thinking about defensive stocks, focus on where consumers spend money in good times and bad. Typically, consumers cut these industries last when they tighten their budgets. Here are the industries to focus your search on when looking for defensive stocks:

  • Utilities: Utility companies provide the necessities of life, like water, electricity and heating. Even when consumers make efforts to cut back, they still need these items and pay their bills every month to avoid being shut off.

  • Telecommunications: Phone and internet services are no longer a luxury in today’s economy. Consumers rely on their cell phones and internet services for major parts of their daily lives, including telephone calls, mobile apps, streaming music, movies and television shows. While consumers may trim certain subscriptions or downgrade their internet speeds, it is highly unlikely that they would shut off their mobile phones or internet service.

  • Consumer staples: Consumer staples are the household basics that consumers purchase regularly. Examples include toothpaste, toilet paper and soap. Because consumers may swap out lower-priced brands to save money during lean times, these stocks often have products at multiple price points to capture large shares of the market.

  • Healthcare: During a recession, consumers may hold off on elective procedures, but they still spend on daily medicines and regular check-ups. And you cannot delay some procedures, so they provide additional revenue during a downturn.

  • Real estate: Real estate trends are mixed during downturns. Many consumers hold off on making large purchases, like buying a home. However, people still need a place to live. This provides an excellent opportunity for landlords with increased demand from qualified tenants to rent their investment properties.

Why Defensive Stocks Matter

To achieve your long-term investing goals, it is important to remain invested in the stock market. By shifting your portfolio to a more defensive stance with defensive stocks, you’ll preserve capital and benefit from dividends and appreciation.

Both experienced and beginner investors have concerns when the stock market is volatile. Investors who are close to their financial goals get worried about being set back years from hitting the finish line. While beginners feel the immediate sting of their latest investments losing money.

These are valid concerns. However, completely existing stock positions can exacerbate the problem. Especially if the market goes up further. Adding defensive stocks to a portfolio gives investors the satisfaction of making a change, while still providing recurring dividends and the potential for market appreciation.

Should You Invest in Defensive Stocks?

defensive stocks
defensive stocks

Having defensive stocks in your portfolio makes sense in every economic environment. While you may consider pivoting your entire portfolio to defensive stocks if you feel uncertainty, that move can backfire and leave you missing out on potential gains.

Nobody can predict where the market will turn next. If you have concerns about the future of the market, consult with your financial advisor. It may make sense to tilt your portfolio more defensively, which involves reducing your risk and buying more defensive stocks. However, you still need to maintain a diversified portfolio that aligns with your long-term goals.

The Bottom Line

Adding defensive stocks to a portfolio is a solid strategy when investors feel uncertain about the economy. They provide a consistent stream of dividend income and they have less volatility than other stocks. While you may want to shift portions of your portfolio into defensive stocks ahead of a downturn, experts recommend maintaining a diversified portfolio because nobody can accurately predict the future. Contact your financial advisor to discuss which defensive stocks would be a good addition to your portfolio.

Tips for Managing Your Portfolio

  • Financial advisors construct diversified portfolios of stocks, bonds and other investments to help investors reach their goals. They can provide guidance on whether defensive stocks make sense for your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Choosing a diversified portfolio is one of the main contributors to reaching your financial goals. Picking a variety of stocks, including defensive stocks, ensures that your portfolio benefits from every economic environment. Use our asset allocation calculator to learn the best portfolio mix for your situation.

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The post Defensive Stocks: What They Are and Why They Matter appeared first on SmartAsset Blog.