In this article, we’ll cover:

• The purpose of defensive stocks
• Advantages of defensive stocks
• Disadvantages of defensive stocks
• Defensive sectors to invest in

Defensive stocks’ role in your portfolio

Investing in defensive stocks may lower your overall risk as part of a diversified portfolio. As the name implies, they can act as a kind of protective shield that helps investors endure market downturns. They tend to have lower volatility and provide more stable earnings. 

Many investors include defensive stocks in their portfolios to counterbalance potential losses from more volatile securities. Opinions about what percentage of your portfolio you should invest in defensive stocks vary wildly. Ultimately, it’s a personal decision based on your long-term goals and tolerance for risk. 

Pros of defensive stocks

Generally speaking, investing in defensive stocks can be less risky than investing in cyclical stocks. Of course, any type of investing comes with risk, including the potential to lose money. But due to the consistently in-demand nature of goods and services associated with defensive stocks, they’re seen as less likely to drop in value during a stock market downturn or a recession. 

Another advantage of defensive stocks’ low volatility is predictability. The return on defensive stocks is usually slow and steady, as are dividends if the company pays them, which can make it easier to predict how your investments will grow over time. That might be appealing if you’re working toward a specific financial goal or planning for retirement.

Cons of defensive stocks

On the flip side, the generally slow growth of defensive stocks often leads to smaller gains during a bull market. When other stocks are soaring, defensive stocks are more likely to perform below the market. 

In a stock market downturn, owning defensive stocks may have advantages, but trading them can backfire. They may become overvalued during a recession because lots of people are snapping them up, driving up the share price for buyers.  

Industries in the defensive sector

First things first: what’s the difference between a company, an industry, and a sector? Each term describes a piece of the economy, and companies are the smallest pieces. A collection of companies makes up an industry, and industries make up sectors. There are eleven sectors reflected in the US stock market; utilities, consumer staples, and healthcare represent the main defensive sectors. If you’re looking to invest in defensive stocks, you might want to consider shares in companies with a long track record of success in these sectors. 

Companies in these sectors cater to people’s basic needs, providing goods and services that are in constant and consistent demand. In a recession, consumers tighten their belts, but they’re not likely to stop paying their electric bill, buying groceries, or skipping their prescriptions unless dire circumstances require it. Constant consumer demand means defensive stocks tend to have low volatility, stable earnings, and steady dividends through the ups and downs of the market; the consistency of consumer needs explains why these stocks maintain slow growth during a booming economy.   

Utilities sector

The utilities sector includes electric, gas, and water utilities, as well as companies that operate as distributors or producers of those utilities. Renewable energy sources like solar panels and wind turbines are also included. Even in a recession, consumer spending on utilities is less likely to drop, so the value of stocks in this sector remain relatively stable.

Consumer staples sector

Companies in the consumer staples sector are often less sensitive to big economic fluctuations because people are unlikely, unwilling, or unable to cut these items out of their budgets, regardless of their financial situation. Companies that manufacture or distribute food, beverages, tobacco products, personal and hygiene products, and non-durable household goods make up the consumer staples sector. Unlike stocks in the consumer discretionary sector, which includes companies like car manufacturers and hotels, stocks in consumer staples tend to hold steady when people reduce their spending during a recession.

Healthcare sector

The healthcare sector includes businesses that provide medical services and insurance, manufacture medical equipment or drugs, and/or facilitate patient healthcare in hospitals, clinics, labs, and nursing homes. Because healthcare is a necessity and medicine and medical equipment are always in demand, this sector offers strong defensive investment opportunities. 

Managing risk with defensive stocks + a diversified portfolio

Building a defensive investment strategy might help protect you from greater losses during a recession or economic downturn. Investing in defensive stocks is one starting point, but it’s just part of the puzzle; you can further reduce your risk with a diversified portfolio containing a variety of holdings that are not all subject to the same market risk. 

With Stash, you can build a portfolio of many types of stocks, as well as exchange-traded funds (ETFs), bonds, and even cryptocurrency. And with the Stash Smart Portfolio, you get automated investing tailored to your goals.

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Defensive stocks FAQ

What stock sectors are considered defensive?

Utilities, consumer staples, and healthcare represent the main defensive sectors. These sectors are considered essential and typically maintain their income streams and overall stability even when the market is volatile.

What are examples of defensive stock?

Examples of defensive stocks include any essential items from defensive sectors like groceries, personal hygiene products, water, electricity, heating, and pharmaceuticals.

What is defensive vs cyclical stocks?

Defensive stocks are nearly always in demand because they provide essential products and services while cyclical stocks are affected by consumer demand and systemic changes like market downturns.

The post What Are Defensive Stocks? appeared first on Stash Learn.

These items are known as consumer staples, because we buy them regularly, through good economic times and bad ones. Why? Because we need them.

In fact, consumer spending drives about 70% of all economic activity in the U.S. We spend up to a quarter of our income on consumer staples.

Here are some examples of top consumer staples companies, and the products you might be buying:

• Campbell Soup, which makes its iconic tomato soup and hundreds of other varieties of soup, also produces Pepperidge farm cookies, V8 vegetable juice, and Pacific Foods organic broths.
• Coca-Cola, which manufactures soft drinks including Coca-Cola, Fanta, Sprite, and Odwalla.
• Conagra produces Hunt’s ketchup, Hebrew National hotdogs, not to mention Redi-Whip and Peter Pan peanut butter.
• General Mills, producer of Cheerios, also makes Pillsbury products, Haagen-Dazs ice cream, not to mention Green Giant canned vegetables, and Nature Valley granola bars.
• Hershey Company, the maker of chocolate bars, also churns out Kisses, Kitkats, Fifth Avenue bars, and Twizzlers, among others.
• Kellogg’s gets your morning going with frosted flakes, Eggos, Rice Crispies, and Pop-tarts.
• Kimberly-Clark’s products include household items such as Kleenex, Huggies, Scott toilet paper and Kotex.
• Procter & Gamble, the maker of Pampers disposable diapers, Oral-B toothbrushes, and Tide laundry detergent.

Who makes consumer staples?

Big companies such as Johnson & Johnson and Procter & Gamble dominate the industry producing consumer staples, and their stocks are often known as defensive stocks because they can provide shelter when the economy encounters difficulties such as a slow down or a recession.

How can consumer staples help diversify your portfolio?

Consumer staples stocks have a reputation for independence from the usual ups and downs of the market. That’s because the companies that produce consumer staples rely on consumers’ everyday use of their products.

This dependability makes consumer staples different from items that people might buy when they have extra money lying around, such as new cars, clothing, and home appliances.

What’s the difference between buying toilet paper and a washing machine? Bigger purchases are said to be made with discretionary spending dollars, and they definitely depend on economic cycles—when times are good, people buy more of them, and fewer when the economy is not so good. We all need toilet paper, no matter how the economy is doing.

And investing in the consumer staples sector could potentially add a counterbalance to riskier growth stocks in your portfolio, as consumer staples may be less volatile than other assets.

When you’re thinking about your portfolio, however, it’s important to keep in mind that each person’s situation is different, and there is no one way to diversify your holdings. A proper diversification strategy should be tailored to your own situation.

Consumer staples and dividends

Many consumer staples companies also pay stock dividends, which is generally a sign of their stability and maturity as businesses. Dividends can also add to investors’ total returns over time. Examples of consumer staples companies have recently paid dividends include Hershey, Procter & Gamble, and Kimberly-Clark.

Consumer staples in 2018

Consumer staples haven’t had a great 2018. As a category, these stocks are down about 6.7% for the year, according to research.

Rising interest rates, the pressure to continually cut product prices, competition from e-commerce companies, and growing consumer preference for smaller independent brands have taken the wind out of the sails of the sector temporarily, according to some analyst research.

Nevertheless, during the late phases of strong economic cycles, such as the bull market we’ve been in for the last decade, consumer staples also tend to do better, according to analysts.

Consumer staples during the 2008 financial crisis

In fact, consumer staples were one of the best performing sectors during the financial crisis that began in 2008, dropping about half as much as the broader market. (During the Dotcom bust of the early 2000s, when the S&P 500 lost half its value, returns on consumer staple stocks actually increased 1.2%, according to reports.)

While consumer staples companies may grow more slowly than the high-flying companies in the technology industry or other red-hot sectors, they tend to grow dependably over time.  For example, in 2018, the sector is expected to notch earnings growth of approximately 11%, about half the rate of the broader S&P 500 index.

Meanwhile, consumer spending in the U.S. on staples is expected to grow by about $600 billion by 2020, according to investment research.

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