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What is a Defensive Investment Strategy?

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  • Written By: Ken Black
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 February 2020
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A defensive investment strategy is one that includes a portfolio of investment options designed to minimize the risk of losses to the investor. Popular choices for a defensive investment strategy include bonds, currency, very safe stocks and perhaps precious metals. This type of investment strategy may be recommended for some as they get closer to retirement age, or for those who are not willing to risk much.

Generally, a defensive investment strategy is not recommended for those who are just starting in their careers. At this stage, some amount of loss is acceptable, compared to the gain that can be realized. Also, if a loss does occur, there is more time to make it back. Therefore, a defensive investment strategy does not provide much in terms of financial gain for those looking at retirement decades into the future.

However, for those who are approaching retirement, their strategy will likely need to change. By this time, the investor has probably built up a good amount of money in his or her portfolio. Losing a significant portion of it at this stage could lead to catastrophic results. It could have the effect of delaying retirement out of financial concern.

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Therefore, the portfolio allocation for those nearing retirement will likely gradually move toward a full-scale defensive investment strategy in order to minimize risk. At some point in the working life of an investor, the goal is not to increase gains, but to protect those gains from annual fluctuations that may occur in the stock market.

Bonds, especially government bonds, become a primary vehicle for executing this investment strategy. Due to the fact that government bonds are very secure, investing in them is considered a defensive investment strategy. The most secure bonds are federal bonds, but even municipal bonds carry a great deal of security in most cases.

Corporate bonds can also be a good defensive investment strategy. While these are not as safe as government bonds, looking at the bond rating of a company can provide some assurance to the investor of the company's ability to pay back its obligations. Still, those looking for an extremely safe, foolproof strategy may be less willing to consider corporate bonds.

Keeping some money in the form of currency, not for trading for international currency but as a backup, is also a defensive investment strategy. Currency, unless the government collapses, will always retain some value. However, it should be noted that, unless deflation occurs, the longer the currency is held, the less valuable it will become. Therefore, most financial advisors are not likely to suggest this as a wise strategy.

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