What is defensive investing, and how does this investment strategy work?

Defensive investing is a strategy where you take as little risk as possible and choose stable investment products that have proven themselves over the years. Typically, these include stocks of established companies that pay a fixed dividend each year and show little volatility. And also bonds and other fixed interest rate products that provide stable returns.

Long-term returns

Defensive investing focuses on the long term rather than quick gains. Investing guru Warren Buffet is one of the best-known proponents of this strategy. One of his most famous sayings is "Rule No. 1: Never lose money. Rule No 2: Never forget rule No 1”.

So, defensive investing is about losing as little as possible. The goal is to stack profit on top of profit, creating a snowball effect. This is also called compound interest.

For example, suppose you invest €1,000 and get an annual return of 10%. Here’s how your investment would grow over the years:

The above example shows how compound interest works with a single initial investment. But if you periodically add to that investment and reinvest the income from dividends, the snowball can start getting bigger and bigger

Note: In the example above, we assume an annual return of 10%. Of course, this is not guaranteed. You can also suffer losses.

Defensive sectors

The three main defensive sectors are utilities, food & groceries and health care. All have one thing in common: they provide products we can't live without. And when inflation is on the rise, causing everything to become more expensive, these companies can raise the prices of their products. Therefore, they are able to keep their profit margins high.

Fixed dividend rate

Most defensive companies have been around for decades. In many cases, they have grown substantially in the past. And now that they’re matured, their focus shifted primarily to making profit. Some of the most popular defensive stocks distribute a great portion of their profit to pay their shareholders. When buying defensive dividend stocks, it’s wise to check the dividend rate (the amount of the dividend paid divided by the stock price), the company’s dividend history and the future projections of the company's dividend.

Low fluctuations

Defensive stocks are known for having fairly stable share prices. Compared to growth and cyclical stocks, the price movement is less volatile. This fits right into the strategy of defensive investing.

Bonds

A well-diversified defensive portfolio often includes bonds. Bonds with high credit ratings are generally safer investment products (although all investments come with risk). Bonds have a fixed expiry (maturity) date, so you know when you’ll get your money back. The interest rate (coupon) on bonds is often not particularly high, think a few percent per year.

The time frame you’re using for your investments often determines how large the proportion of bonds is in your portfolio. Let's say you save for retirement and invest for 30 years. In the beginning, you want to build up capital, and thus the proportion of bonds within the portfolio will be somewhat lower. As you reach retirement age and your portfolio value has grown, you may want to build in more security and take less risk. By increasing the proportion of bonds, you have more security on holding your assets. In addition, you are less vulnerable to a stock market crash. After all, the older you get, the less time you have to recover from such an event!

Investing via DEGIRO

We want to make investing accessible to everyone. If you use an defensive investment strategy, we offer many investment products that can help you achieve this.

After you open an account, you can get started right away. Check out our Fees page to see what the fees are for the different investment products.

The information in this article is not written for advisory purposes, nor is it intended to recommend investments. Please note that information may have changed since this article was written. Investing involves risk. You may lose (part of) your investment. We advise you to invest only in financial instruments that match your knowledge and experience.