Is It Time To Play Defense?

Defensive investment strategies are designed to protect your portfolio from losses rather than to increase its value. There are two primary reasons for considering a defensive strategy.

  • You’re approaching retirement. If you’re nearing retirement or facing other life circumstances that make preserving your capital more important than growing it, defensive investment strategies are a logical course.
  • You expect a market downturn. If you believe that a bull market has run its course and the bear is lurking on the horizon, you may elect to take profit on volatile investments and move all or part of your portfolio into a defensive position.

US stocks have been in a bull market since March 2009, a 12-year run of gains. That’s been a profitable period for US stock investors. It also raises concerns about “recency bias”: the assumption that things will keep going as they have been recently.

We’ve seen periods with dramatic stock gains before. The bull markets of the late 90s and the mid-2000s were followed by steep market crashes, recessions, and BIG losses for investors who had settled into an aggressive investment pattern.

Markets bounced back, but investors who adopted defensive investment positions before the crashes suffered less damage. The more-defensive Dow 30 suffered much less severe losses than the S&P 500 in both the 2001-2002 and 2008-2009 recessions.

Several indicators suggest that markets are moving into risky territory. (per WSJ)

  • Stock valuations are high relative to sales, earnings and GDP.
  • Corporate debt levels are similar to those seen before the 2008 and 2001 market crashes.
  • Margin debt – money investors borrow from brokers to make stock purchases – is at historic highs.

These indicators raise suspicions that the current bull market may be peaking, but that’s not a consensus view. Many analysts also believe that the end of the COVID-19 pandemic could propel an economic recovery and push markets even higher.

Markets rise and fall. Recessions and bear markets happen. Nobody can time exactly when they will happen, but when investors face concerns about over-valued markets, many of them begin considering defensive strategies. Understanding those strategies can help you preserve your capital when a bear market arrives.

These are four common defensive investment strategies:

Rebalance Your Portfolio

Many investors choose a specific asset mix designed to fit their risk profile. This mix defines what percentage of the portfolio is invested in each asset class. Over time some assets perform better than others, which moves the portfolio away from the original allocation. Rebalancing typically involves selling part of the high-performing section of the portfolio and adding to the low-performing classes. It sounds strange to discard productive assets in favor of less productive ones, but the high fliers have farther to fall when things turn down, and history shows that over time the performance of different asset classes tends to equalize.

Invest for Dividends

Dividend-paying stocks are a staple of the defensive portfolio. Dividends are typically paid as a flat amount per share, so the dividend yield rises as the stock price falls. If a stock selling at $50/share pays a dividend yield of $2/share, the yield is 4%. A price drop to $30/share with the same dividend puts the yield at 6.67%. If you buy in at that price, your yield remains the same even if the stock price rises, an opportunity for both income and capital gain.

When the price of a dividend-paying stock falls abruptly, investors seeking dividend income tend to step in and buy, stabilizing the price. This makes stocks with a strong history of dividend payments a core part of most defensive portfolios.

Go for Gold

Investors have traditionally viewed gold as a “safe haven” investment during times of economic turbulence. Gold has often – but not always – gained in value during recessions, including the last two US recessions. (per WSJ). Buying and holding physical gold can be complicated, but investors can gain gold exposure by buying gold ETFs or shares in gold mining companies.

Concentrate on Cash

When markets turn down, cash is king. That’s not just because cash holds value when stocks fall. For seasoned investors, a market crash isn’t a disaster. It’s an opportunity. A strong cash position leaves you ready to pick up shares of quality companies at bargain prices. You won’t call the bottom exactly – nobody ever does – but if you’re selling high and buying low, you’re on the road to investing success.


The defensive strategy you choose will be determined by your financial situation:

  • If you’re approaching retirement and you need income from your investments, you will probably want a portfolio weighted heavily toward fixed-income securities and dividend-paying stocks..
  • If you’re concerned that markets are overstretched, but you don’t think a crash is imminent, you may want to maintain a more aggressive stance and focus on protecting your positions with stop-loss orders and rebalancing your portfolio regularly.
  • If you believe that a market crash is imminent, you may wish to take up a fully defensive position with a significant cash component held ready to pick up shares in strong companies when they reach attractive valuations.

You may contact Mike Stiefel at: or M: (310)-383-9703

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be
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Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.

The financial professional associated with this page may discuss ad/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.