Preventing against downturns
Investors can protect against falling valuations by investing defensively, meaning the investor focuses on generating income rather than strictly on capital gains.
This can be through typical predictable purchases such as bonds, additional cash holdings or through buying blue-chip stocks, according to Commsec.
“The whole concept of defensive equities is to try to take advantage of that positive income characteristics through a dividend but limiting that volatility and that downside through fundamental analysis and portfolio management,” added Aaron Binsted from Lazard Asset Management.
When to start thinking defensively
Typically, investors should start to consider defensive investing as they near retirement age, particularly when markets are volatile.
By the point of retirement, with more significant capital in their portfolios than younger investors, big risk is not necessary to achieve the desired level of return.
“In the decade before retirement, people should start to think about changing their exposure from direct equities or just normal managed funds into defensive equities. Then, by the time they are in retirement, their defensive equity should be a much higher proportion,” said Mr Binsted.
Being defensive in the share market
Investing in defensive equities are one way investors can generate income, while taking a protective approach to their capital and savings.
Defensive equities are typically not cyclical, meaning they don’t escalate and plummet with market highs and lows. Examples include shares from reliably funded industries with heavy demand, such as healthcare and energy suppliers.
“It gives people a good level of income into the future, and secondly it can really manage those negative sides of equities that people worry about – dividend cut risk, high volatility and significant draw down in negative markets. Defensive equities are all about managing and lessening those. In the seven years we have managed the funds in every negative month of the ASX200, the fund has only fallen 51 per cent of the markets drawdown, ” said Mr Binsted.
Cameron Micallef is a journalist at Nest Egg, writing primarily about personal wealth and economic markets.
Prior to this, Cameron worked for Australian Associated Press. He graduated from the University of Wollongong with a double degree in communications and commerce.