Make Your Portfolio More Defensive – Kiplinger’s Personal Finance

Football teams aren’t the only ones that rely on defense to protect a lead. Investors can also boost their odds of success by listening to the voice in their head chanting Dee-fense!

Going all-in all the time isn’t always the best investing game plan – especially after a big rally such as the current bull market, which has propelled the S&P 500 Index to a gain of more than 100%. “People need to remember that markets don’t always go up,” says Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

That’s especially true now. With warnings about headwinds for the economy ranging from the Federal Reserve dialing back stimulus to slowing corporate profit growth in 2022 to crises in China, there’s no telling when the green light flashing on Wall Street will turn yellow or red.

If your gut is telling you that a big stock market drop is coming, or you’re guilty of letting your winners run too long, or big down days make it hard to sleep at night, it might be time to dial back risk in your portfolio.

Tweaking a portfolio to make it more defensive doesn’t mean exiting the stock market completely or stashing all of your cash in a bank account that pays zero interest. We’re talking about a tactical approach that lowers the risk and volatility in your portfolio, protects gains, and keeps your mix of assets in sync with your risk tolerance.

“Sell down to your sleeping point,” is the way Barry Bannister, chief equity strategist at investment bank Stifel, puts it. Here are ways to bring a high-flying portfolio closer to earth.

Tilt Your Portfolio Toward More-Defensive Sectors

Buying highfliers makes sense when the market is in go-go mode. But more-defensive corners of the market tend to hold up better during downdrafts – think utilities, real estate investment trusts (REITs), com­panies that sell consumer staples such as toilet paper and toothpaste, and healthcare companies that make prescription drugs and medical devices.

As market turbulence rises, investors move toward stable, financially strong, dividend-paying businesses whose fortunes don’t rise and fall with the economy. “People have to buy shampoo and ketchup regardless of what the unemployment rate is,” says Shalett.

During bear markets since 1946, the healthcare sector had the smallest average loss (-12%), followed by consumer staples (-13%) and real estate (-18%), according to CFRA, a Wall Street research firm. More aggressive and economically sensitive sectors fell about 30%, on average. Of course, playing defense all the time will result in smaller returns over the long term.

But for those looking to de-risk, one way is to trim holdings in aggressive sectors, such as technology, and move the …….


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