Should One Include Defensive Stocks in Their Long Term Investment Portfolio?
Long term investment in equities is one of the best ways to create sustainable long term wealth. But in the process of long term investment in the stock market, there will be a lot of challenges too in the form of stock market corrections.
Stock market corrections can be attributed to numerous reasons like economic slowdown, terrorist attacks, military conflicts, trade wars between countries, depreciation of the rupee, rising oil prices, political or global instability etc. The list is endless.
The latest example being the ripple effect of Coronavirus outbreak in China affecting global markets, including India. Check out the impact of Coronavirus on the stock market in India here.
As an investor, many of these things are beyond our control. That is why stock market investors need to be well-prepared in advance for such difficult times. Like the huge market crash of 2008, post the American sub-prime crisis when the realty bubble burst across countries.
On 15th October 2008, the Standard & Poor's 500 which is based on the market capitalization of 500 large-cap American companies, saw the second-worst ever crash in its history with a loss of 9 percent in its value. However, even in such a situation, there was one stock which outperformed and ended in positive.
It was Coca-Cola because it had beat estimates with a jump in its revenue and earnings. This happened even as most stocks in the worldwide stock markets were getting battered black and blue.
No wonder legendary investor Warren Buffett's most significant holdings are in Coca-Cola.
It is impossible to predict when history might repeat itself, and another 2008 like crash might happen. That's why every investor should also havesome excellent defensive stocks in their long term investment portfolio.
The below steps will help an investor to find some good defensive stocks.
Include blue-chip companies in your long term investment portfolio
Blue-chip companies in the stock market are generally considered to be safer investments because of their capability to generate profits even during an economic downturn. They have a very stable growth rate and hence prone to less volatility as compared to companies which are still in the developmental stage.
Include FMCG, logistics and healthcare companies in your long term investment portfolio
FMCG, logistics and healthcare companies in the stock market are considered safe sectors to invest, which can help one’s long term investment portfolio beat a bear market. Their share prices increase at a slower pace than cyclical stocks, but their downfall is also limited during an economic downturn.
During the global financial crisis of 2008 between January 2008 till April 2009, when the recovery process started, the FMCG sector lost just 3% compared to the Sensex, which lost 55%.
Include dividend-paying stocks in your long term investment portfolio
Investing in high-quality, dividend-paying stocks is a time-tested way to protect your collection against uncertain times. When markets are directionless during periods of volatility, dividends can provide some relief against significant losses.
It is a proven fact that businesses with a long record of paying dividends are often better managed.
To conclude, the next economic downturn may be just around the corner or after ten years. Nobody can predict that. By including some good defensive stocks in their long term investment portfolio, investors can be sure that their portfolio not just withers any recession but will be the first to recover and outperform.
However this does not mean that one should only invest in defensive stocks. A well diversified portfolio also needs high growth stocks which can compound your wealth at a faster pace when the tide changes and market becomes bullish.
Research and Ranking can help you to identify and invest in stocks of solid, well-run and growing businesses, which have the potential to grow up to 4-5 times or more in 5 years. Know more.