DEFINITION of 'Defensive Investment Strategy'

A defensive investment strategy is a conservative method of portfolio allocation and management aimed at minimizing the risk of losing principal. A defensive investment strategy entails regular portfolio rebalancing to maintain one's intended asset allocation; buying high-quality, short-maturity bonds and blue-chip stocks; diversifying across both sectors and countries; placing stop loss orders; and holding cash and cash equivalents in down markets. Such strategies are meant to protect investors against significant losses from major market downturns.

BREAKING DOWN 'Defensive Investment Strategy'

With an offensive or aggressive investment strategy, in contrast, an investor tries to take advantage of a rising market by purchasing securities that are outperforming for a given level of risk and volatility. An offensive strategy may also entail options trading and margin trading. Both offensive and defensive investment strategies require active management, so they may have higher investment fees and tax liabilities than a passively managed portfolio. A balanced investment strategy combines elements of both the defensive and offensive strategies.

Defensive Investment Strategy and Portfolio Management

A defensive investment strategy is one of several options in the practice of portfolio management. Portfolio management is both art and science; portfolio managers must make critical decisions for themselves or their clients, taking into account specific investment objectives and capabilities and selecting proper asset allocation, balancing risk and potential reward.

Many portfolio managers adopt defensive investment strategies for less risk averse clients, such as retirees without steady salaries. Defensive investment strategies could also be appropriate for those without much capital to lose. In both cases, the objectives are to protect existing capital and keep pace with inflation through modest growth.

Selecting investments in high-quality short-maturity bonds, such as United States Treasury notes (T-notes) and blue-chip stocks (securities of large, well-established and financially sound companies like IBM Corp., Coca-Cola Co. and Boeing Co.) are solid tactics. Holding a moat of cash and cash equivalents, such as U.S. Treasury bills (T-bills) and commercial paper (unsecured, short-term debt instruments that companies often issue to meet short-term liabilities) can also help to keep pace with inflation and protect the portfolio in down markets.

In contrast, portfolio managers may adopt an aggressive investment strategy with clients that have more capital that they can afford to lose. This could occur if the market takes a turn for the worse or riskier investments like high-growth technology stocks, venture capital, alternative investments, and emerging market debt do not pan out. Both wealthier clients and younger clients are candidates for more aggressive investment strategies. Younger clients generally have longer time horizons, steadier salaries, and can afford to take more risks.

RELATED TERMS
  1. Defensive Acquisition

    Defensive acquisition is a corporate finance strategy describing ...
  2. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  3. Investment Strategy

    Investment strategy is what guides an investor's decisions based ...
  4. Managed Futures

    An alternative investment strategy in which professional portfolio ...
  5. Investment Management

    Investment management is a generic term that most commonly refers ...
  6. Portfolio Management

    Portfolio Management is the art and science of making decisions ...
Related Articles
  1. Managing Wealth

    Achieve Optimal Asset Allocation

    Minimize risk while maximizing return with the right mix of securities and achieve your optimal asset allocation.
  2. Managing Wealth

    Choose Your Own Asset Allocation Adventure

    There are many strategies to help balance your portfolio. Here are a few to get you started.
  3. Managing Wealth

    6 Asset Allocation Strategies That Work

    Your portfolio’s asset mix is a key factor in its profitability. Find out how to achieve this delicate balance.
  4. Investing

    Introduction to Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  5. Investing

    Defensive Investing Is One Way to Manage Volatility: Charles Schwab

    With volatility back and likely here to stay, getting some defensive investments in your portfolio can help, says Charles Schwab.
  6. Investing

    A Strategy For Optimal Stock And Bond Allocation

    We tell you how this strategy avoids downturns, improves performance and invests in the best asset classes.
  7. Financial Advisor

    Asset Manager Ethics: Investment Process and Actions

    Managers, in developing their investment process, need to determine some “general rules” that make it meaningful. We offer six.
  8. Investing

    Fidelity Special Situations Fund Bets on Defense Spending Increases

    The Fidelity Special Situations fund is allocating more to defense stocks thanks to the White House's increased budget.
  9. Investing

    Diversification Strategies: Stocks Vs. Gold

    When it comes to asset allocation, is gold a solid diversifying asset class?
  10. Investing

    Understand Your Role In The Investing Process

    Knowing what to expect when managing your assets will help you achieve your financial goals.
RELATED FAQS
  1. Passive vs Active Portfolio Management

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center