How to Build a Defensive Investment Portfolio
A defensive investment strategy is one designed to preserve assets, regardless of the condition of the market. A defensive portfolio sacrifices returns on the investment in order to minimize the risk. Defensive portfolios combine cash and cash equivalents with other safe securities to optimize the portfolio at a very low risk level. The following steps will describe the various asset classes that are often combined in a defensive portfolio.
Other People Are Reading
Instructions
-
-
1
A defensive portfolio requires a certain portion of your liquid assets to be kept in cash or cash equivalents such as a money market account. These accounts earn a small return but are considered to be one of the safest forms of investments, similar to a savings account.
-
2
Investments in U.S. Treasury bills, or bonds, provides a virtually risk-free opportunity that will generate a modest guaranteed return. Treasuries provide minimal return, so should only make up a portion of the portfolio, depending on your individual risk tolerance. Increasing the percentage of a portfolio invested in Treasuries reduces the risk of the overall portfolio.
-
-
3
Inflation can significantly erode the value of a fixed income investment portfolio. Treasury Inflation-Protected Securities, or TIPS, provide a hedge against inflation. The price of these securities will be adjusted to ensure that your investment keeps pace with inflation.
-
4
Bonds issued by city and county governments provide another relatively safe investment with a guaranteed return over time. Some municipal bonds offer tax advantages as well.
-
5
A fixed income can be generated by purchasing debt issued by corporations. Corporate bonds generally provide higher returns than Treasuries or municipal bonds, but come with a higher risk of default. Corporate bonds can be combined with safer investments to increase returns while maintaining a low-risk portfolio. Corporate bonds vary widely in their risk level as well as the return they provide, depending on the individual corporation. Carefully research the credit ratings of companies before purchasing their debt. Buying bonds from many companies in a variety of industries reduces the risk level of the portfolio.
-
6
Purchase well-established equities. Stocks with low volatility and high dividends can be added to a fixed-income portfolio. These types of stocks further increase returns on investment while still providing an income. Stocks in discount retailers such as Wal-Mart, Costco and McDonald's are often purchased as part of a defensive portfolio. These businesses generally do well in a recession when consumers are looking to save money. Equities should comprise a smaller percentage of a defensive portfolio as these types of investments contain higher levels of risk.
-
1
Tips & Warnings
Risks to protect yourself from: volatile returns, default risk, inflation risk...
Always talk with an expert before making investing decisions. Avoid fees as much as possible.
References
- Photo Credit Thinkstock/Comstock/Getty Images
