Should You Invest in Defensive Stocks

stock-market Should You Invest in Defensive Stocks

stock market

You never know when the economy is going to plummet and with the look of things you can’t be sure whether the stock you have invested in is going to increase in price or not. In order to secure your financial future, it is necessary that you invest in defensive stocks. A defensive stock is a type of stock that investors particularly opt for at times of uncertainty. Defensive stocks are sometimes referred to as non-cyclical stocks solely due to the fact that they do not depend on general economic trends as most other stocks do.

Defensive stocks are effective because they outperform traditional cyclical stock when the chips are down and investors want something solid to hold on to. If you think about some of the basic necessities of life, which are food, clothing and shelter, you have essentially the three basic facets that make a defensive stock that you can include in your investment portfolio.

So, Why Invest in Defensive Stocks?

Now, you may be thinking that when the chips are down and the economy looks bleak, who in their right mind would want to invest in stocks? Why not invest in a Treasury bill instead, which offers a decent rate of return with no risks? Although these are smart questions, the answer is relatively simple when you come to think about it: greed and fear are the primary reasons driving any market.

Defensive stocks have the capacity to adapt to the ‘greed’ elements by substantiating an increased dividend yield that you can enjoy in a low interest market. And at the same time, a defensive stock can also assuage the ‘fear’ element due to the fact that defensive stocks are not risky, unlike regular stocks. It literally takes a sharp economic catastrophe to disrupt the defensive stock business model.

It should also be known that most investment managers have no choice but to buy stocks and if they think times are harder than normal, they will migrate toward defensive stocks. The main question you should be asking is what are some economic areas where you can strategically invest in defensive stocks? Take a look below and find out:

Foods, Beverages and Tobacco Products

Regardless of the common eat, drink or smoke discernment, even with modern day business developments, you might have never seen tobacco shares slump. But it is important to remember that there are food companies which cannot be exactly considered defensive stocks, but a good way of identifying a defensive stock’s potential is by looking at the sales revenue of a grocery store. If the sales are substantial, you have a potential defensive stock you can invest in.

Restaurants and Food Chains

Restaurants that target the average middle class consumer cannot be considered a defensive investment at all due to the fact that any family can stay at home for dinner for more than 2 nights every week rather than going out to eat. Cheap restaurants, on the other hand, can be considered defensive stocks because people have to eat, right, and most people tend to go to eat at restaurants that offer good quality food at reasonable prices.

Hence, it is safe to say that investing in a restaurant can turn out to be a good defensive play as well as alcoholic beverage manufacturers and bottled water or beverage companies can all be considered defensive stocks.

Utilities 

Water, electricity and gas utilities can also be good defensive investments, simply because people cannot live without electricity, water or gas. You might disagree with this and think that are people who thrive off the grid, but honestly, there can’t more than a small percentage of people living without one or two of the aforementioned utilities. It is important to realize that utility companies benefit in slow-paced economies because of the fact that interest rates are low, which means that they face no problems when borrowing additional funds.

When Should You Buy Defensive Stocks?

The ideal time to invest in defensive stocks is some time before the economy starts to plummet. And that is the main reason why these stocks are known as defensive stocks. But remember when a market starts to enter a bearish trend, it is often too late to invest in defensive stocks.