I didn’t used to like sports but I have to admit that I’ve now joined the dark side. I’m not a sports junkie who can rattle off names and stats without thinking twice. I think I more enjoy the drama of the against all odds team, the too close for comfort final 2 minutes or the dominating power of people like Tiger Woods. (So maybe I do know a couple of names.)
In sports, there are times to be offensive and a time to be defensive. There is a time to go for extra point and there is a time to defend your lead. Your investing portfolio is the same way.
How many investors only know offense? They don’t look at the market conditions. They only know that they invest to make money and they believe that in order to make money you always have to be aggressively investing. These same people also do a great job of losing money any time the market isn’t giving out dollars without any work.
When the economy is in a recession, the first thing to do is change your focus. It’s no longer about first making money. It’s about preserving the money you have so that you have options. Losing money sometimes causes you to be in a position to have to wait for your money to come back and that’s frustrating so how do we play defense with our portfolio?
1.) Change your focus- In a down market, not losing is the new gaining. If you’re beating the S&P 500, you’re winning even if your portfolio is down. During significant market downturns, it’s going to be very difficult to not lose money but if you are losing less than the index, don’t get too alarmed and make big changes. Be patient.
2.) Think of what people have to have- Will a recession cause people not to buy their prescription drugs? How about food? Will the nation give up their bad habits because of the recession? Of course the answer is no so find those defensive stocks and build a position. They will probably not drop nearly as much as luxury stocks.
3.) Think discount stores- Walmart, Dollar Tree, and other value priced retail stores. People are looking to save money in economic downturns and these stocks will probably rise.
4.) Treasuries- Treasury bonds are a great safe haven during a downturn and are normally a good defensive investment. BUT, don’t catch these too late. There are other safe havens if treasuries have already ballooned.
5.) Gold- Gold and other precious metals are a safe haven and defensive in nature.
There are many other defensive positions out there but these five are some of the traditional favorites. Remember, a seasoned investor knows when it’s time to go for the extra point and when to wait and fight another day. In sports they say that the best defense is better than a good offense. I think they say that. I’ve saw it on TV once.