Personal Finance

Defensive Investment Strategies

Defensive investment strategies provide lower yields buy contain less risk to provide you with more financial security when financial planning.

Defensive investment strategies are heavily relied on from conservative investors who don’t want to gamble with their money too much. Rather than diving into risky bets with higher upside, defensive investment strategies focus on consistent returns with long-term value. While it would always be nice to see 8-12% returns on your investments, it is not always that easy. Investors squeeze money managers to increase profits year after year, expecting unaltered growth without a sidestep.

Smart financial planning consists of investing in a diversified portfolio of income producing assets. Investing in good, quality companies that provide value for their customers can lead to lucrative returns. If you can focus on good dividend producing companies that provide long-term value, you can build healthy wealth creation vehicles.

Why to Consider a Defensive Investing Strategy

People often jump into riskier bets with higher upside when money is flowing more freely. During a bull market run, you might be more open minded about investing in a start-up, an IPO or volatile investments along those lines. People are more careless when the economy is in good shape which can cause some buyers remorse down the line.

It’s not until there’s a pullback in the market when investors retreat for more conservative investment strategies. When a bear market hits, people tend to run for safer places for their money to sit; often offering much lower yields. With the COVID-19 pandemic still rapidly spreading across the world, investors are still unsure about where to invest their money. The future doesn’t look promising with grim news emerging every few days.

There are a few different kinds of defensive investment strategies you can choose from, each with their own advantages and disadvantages. When evaluating different investment strategies, you’ll need to define your appetite for risk while balancing your desire for lucrative rewards. Allocating your money carefully will be crucial, especially during economic pullbacks.

Defensive Investment Strategies - REITs, TIPS, Bonds, Stocks, ETFs, Mutual Funds
Defensive Investment Strategies include a diversified portfolio – REITs, TIPS, Bonds, Stocks, ETFs, Mutual Funds

Do Not Try Timing The Market

If you are expecting to time the market, you are playing a risky game. It is recommended to practice averaging-in rather than trying to time the market when it bottoms out. Nobody knows what the bottom will hold. In fact, some people wait for the lowest price long enough where the opportunity passes them by. Prices will stabilize, the market will recover and the overall health of the economy will level out over the course of time. The question everybody is asking is how long?

There is no telling how long it will take for the economy to recover from a struggling market. The key thing to do is remain consistent with your contributions to your portfolios and continue to invest in your financial future. Stocks tend to be volatile during slowdowns in the economy; successful investors are willing to weather the storm with a diversified portfolio built for the long-haul.

REITs

Real estate investment trusts are companies that own and collect rent from commercial and residential properties. These types of investments are bundled into real-estate mutual funds. REITs are recommended because they do a good job at combating inflation and they are good dividend producing assets. If you are unsure about where to find solid REIT choices, you can invest in diversified index funds rather than sector-specific REITs. Fidelity, BlackRock, Vanguard, Schwab; they all offer diversified REIT investment opportunities with little-to-no barrier to entry.

Vanguard Real Estate ETF is one popular REIT Index that is seeing extremely low prices currently. If you take a look at the past 5 years of stock ticker symbol $VNQ, you’ll see the current price per share is hovering just above $55 per share. VNQ has not been priced this low since 2011 and has a strong dividend at 6.22%.

Vanguard Real Estate ETF - Defensive Investment Strategies
Vanguard Real Estate ETF – 5 Year View

While the Vanguard Real Estate ETF is a heavily discounted stock, there are many others that you can take a look at that might be an attractive buy. There are a handful of alternative REIT funds you can evaluate and choose to invest in.

Realty Income Corp or ticker symbol $O was recently suggested as a good buying opportunity from Seeking Alpha’s Brad Thomas. His analysis breaks down the strong points for the REIT and explains the reasons why he thinks it’s a good buying opportunity. Realty Income is a prime example of a strong REIT that you can collect consistent dividends for long-term value. Their portfolio is comprised of a wide variety of holdings that range from retail, commercial and residential properties that provides stability for investors.

Realty Income Corp - Defensive Investment Strategies
Realty Income Corp – 5 Year View

Realty Income, Vanguard Real Estate ETF and other REIT’s all share the same characteristics that make them attractive investment opportunities.

Durability

Because of the vast diversity of investments and the consistent dividend returns of REITs, they offer consistent value for a long-term wealth creation. The durability of the investment can be defined by many components that add up to conservative and stable investment strategies. Real estate is one of the most sought after investment vehicles you can invest in, offering benefits that renters will never fathom.

Buy land, they’re not making it anymore.

Mark Twain

REITs are durable because they are invested in real estate which is a necessity in any type of economy. It is for this reason that it is suggested to invest in solid REITs during an economic pullback. If you can buy REIT shares at discounted prices, you can benefit from the rise in price value along with collecting the dividend payouts. No matter what kind of economy we are in, there will always be a need for different land and real estate properties.

No matter how far back you look, 10 years, 50 years, even 100 years… Real estate returns exceed stocks with SIGNIFICANTLY less volatility!! In fact, according to MillionAcres, since the early 1970’s, real estate has beat the stock market nearly 2:1.

Dividends

REITs offer consistent dividends that accumulate to added value that can compound into a massive wealth creation vehicle. Strong dividend producing stocks that give you the opportunity to collect compounding interest is one of the most powerful things you can do for your financial future. If you invest in dividend producing REITs, you will build yourself a consistent income producing asset that you can reap benefits from for years down the road.

Diversity

The major advantage real-estate investment trusts have over many other investment strategies is the diversity it offers. REIT investments can focus on specific sectors and even specific geographical locations as well. While many diversified REIT index funds are invested in many different sectors, there are different REIT sectors you can choose from that offer their own benefits. There are a handful of different REIT sectors you can choose from when you are looking to invest based on your own preferences.

Different REIT Sectors

  • Office REITs – focus on office buildings in major cities or local towns.
  • Residential REITs – owned properties like student housing, apartment complexes, single/multi-family homes, etc.
  • Industrial REITs – warehouses, factories or distribution centers.
  • Retail REITs – shopping centers, store fronts and retail locations.
  • Lodging REITs – hotels, resorts and travel investments.
  • Self-Storage REITs – storage facilities and warehouses.
  • Healthcare REITs – retirement centers, senior living, rehabilitation centers, etc.

You can find other useful information about REITs here.

Risks of Investing in Real Estate

Any time you invest you are running the risk of losing your money. The problem with today’s economic pullback is that it is turning into a complete debacle. Recently, billionaire investor Tom Barrack warned investors about the U.S. commercial-mortgage market and their risk of collapsing. Barrack suggests that many property owners will have to have flexibility when it comes to collecting rent over the next 60-90 days. While congress is working through approving a plan worth over $500 billion dollars, real estate owners are also going to be relied upon to help reduce the financial stress on mortgages or rent payments.

“We’ve seen that investor confidence has been shaken”

Sam Chandan, associate dean of New York University’s Schack Institute of Real Estate. [Read More on TRD]

The trickle down effect naturally hits the shareholders. This might lead to reductions in dividends or it might even force investors to forgo a dividend until brighter days. When the thought of missing a dividend comes to mind, investors panic and start selling their positions. If this behavior occurs during a recession, it is a good time to buy IF ANY ONLY IF the opportunity is right for the taking. This means the numbers make sense and the value still exists. One missed dividend is no reason to forgo a lifelong investment opportunity in a wealth creating vehicle like a dividend producing asset. Take all things into consideration when you are evaluating where to invest your money.

If you want to diversify even more and protect yourself further, you can also look towards even safer investment vehicles. Government-backed securities are useful investment tools used for defensive investment strategies. While they don’t always provide the highest return on investment, they do protect your money with the backing of the U.S. government.

TIPS (Treasury Inflation-Protected Securities)

Treasury Inflation-Protected Securities otherwise known as TIPS are U.S. government bonds that were first issued in 1997. TIPS automatically rise in value when inflation rises. Due to the full faith and credit backing of the United States, all Treasury bonds are safe from the risk of default or nonpayment. TIPS are recommended investments for a tax-deferred account like an IRA or 401K. The Internal Revenue Service categorizes the increase in values of TIPS as taxable income. It is for this reason that TIPS are best suited for retirement accounts. You can buy TIPS directly from the U.S. government or in a low cost mutual fund.

Although you might not earn much interest on your money, you will have added security. For most investors, TIPS are not the most enticing investment vehicle. For more conservative investors, they rely on TIPS to protect their money against inflation and a crippled economy.

Planning Your Investment Strategies

It might seem hard to see your net worth plummet as the economy experiences pullbacks. As recessions hit the economy, it has a trickle down effect that has negative impacts on almost every industry across the globe. It is where many people struggle and seek relief help. But it is also gives people an opportunity to buy shares of quality companies at a major discount.

When making a plan for your financial investments, be sure to balance out your portfolio accordingly based on your risk tolerance and desire for a healthy return on your investment. You should always compare different investment vehicles that might suit your interests. It is also suggested to speak with a certified financial planner so you can get a professionals opinion on your financial profile.


DISCLAIMER: None of the information below is investment advice or suggestions on how to invest. It is suggested to consult with a financial advisor before making any decisions with your money.

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