SVS Securities - GETTING DEFENSIVE

Constantly thinking that your glass is half empty can often lead to missed opportunities. However, constantly thinking that your glass is nearly full when all you have is a drop of water left is even more damaging. When making financial decisions, realism is the name of the game. Recently, news services across the globe have been giving a lot of air time to the financial markets being in turmoil. A global slowdown, the risk of another recession and the possibility of a European default are making everyone nervous, especially investors. To quote the immortal words of Douglas Adams “Don’t Panic”. It may have become harder to realise huge trading profits, but you can still make a profit in the markets. If you are having problems, perhaps now is the time to consider defensive stocks and the part they play in your portfolio.

WHAT ARE DEFENSIVE STOCKS?

Defensive stocks are believed to provide consistent dividends and stable earnings regardless of macroeconomic fluctuations. Shares in these companies are seen as attractive during times of volatility and economic slumps, but less so during a bull market as they are often seen as performing below the markets during these periods. Defensive stocks rarely shoot up and provide investors with huge, short term returns. They are long term investments to hold in your portfolio to reduce risk and provide stability. Utility stocks are considered defensive because whatever the state of the economy, there will be a constant demand for the services these companies provide. 

ARE DEFENSIVE STOCKS THE ANSWER?

There is no knowing what the markets will do next, no knowing whether any one share price will rise or fall. The advantage of investing in defensive stocks is that they offer a high dividend yields and are less susceptible to market slumps than other companies. They are not ideal for realising huge gains over short periods, they are a long term investment in which you could maintain your wealth whilst making a little extra in way of dividends. The question you need to ask yourself is: do you think the market is going to recover any time soon? There are a myriad of problems confronting the economic world, many of them are going to take months, if not years to put right. This doesn’t mean that you should start running for the hills, you just need to reconsider your portfolio choices and decide whether or not you are sufficiently exposed to companies that tend to weather economic storms rather well and offer high yield dividends.