As the year ends and investors celebrate the holidays with family and friends, the stock market is deep into correction territory and the real estate market may not be very far behind. The suggestion one hears from all sides is that it is time to adopt a defensive investment strategy for 2019 and perhaps beyond. But, just what is a defensive investment strategy? When should you go defensive? And when will it be time to get aggressive again? First, here are some thoughts about going defensive for the coming year.
Defensive Investment Strategy for 2019
As a practical matter, what investments should you look at to protect your portfolio into the next years? Kiplinger suggests 7 strong buy defensive stocks for 2019.
Companies from sectors such as health care and consumer staples offer goods and services that people need no matter what the economy is doing, which leads to more reliable revenues and profits. Still, even outside those sectors, there are a few resilient blue chips that either dominate their market so completely or offer such diversified product lines that they can hang in most market environments. These are the kinds of stocks investors want to pile into.
Here are their seven suggestions.
- Dollar General: Discount retailer
- Waste Management: Largest North American “environment solutions” provider
- Canadian Pacific Railway: Solid, well positioned Canadian and US rail system
- Estee Lauder: Consumer products company in makeup and beauty products
- Boston Scientific: Well-positioned medical device maker
- Deere: Agricultural machinery giant
- Centene: Largest managed care company in Medicaid sector
All of these investment suggestions have a strong defensive aspect but how do you go about choosing your own defensive investments?
Picking Your Own Defensive Investment Strategy for 2019
Investopedia explains the concept of a defensive investment strategy used to reduce the risk of losses in a down market.
A defensive investment strategy entails regular portfolio rebalancing to maintain one’s intended asset allocation; buying high-quality, short-maturity bonds and blue-chip stocks; diversifying across both sectors and countries; placing stop loss orders; and holding cash and cash equivalents in down markets. Such strategies are meant to protect investors against significant losses from major market downturns.
As we can see, there is more to a defensive investment strategy for 2019 than just picking different stocks. As we mentioned in our article about how to invest without losing any money, US treasuries, AAA bonds, and a bank account with Federal Deposit Insurance are all safe bets. On the other hand, in a volatile market that is losing ground, there comes a point at which you should be looking to buy instead of sell. We recently asked if you should sell or buy when investments are volatile. The solid basis for choosing stocks in a down market is intrinsic stock value. When the market is in a panic everybody sells everything just to get out and stop the losses. But, there are stocks that have a good forward-looking income stream in any market. (Years ago we wrote about investing in beer.) finding these companies may take a little homework and you may throw out many that you look at as too difficult to call. But, when you correctly implement a defensive investment strategy for 2019 you will be well-positioned to take advantage of the next upswing in the market.
How Far Will the Market Fall?
One of the valid concerns at this point is that the stock market may have already run its downward course. If that is the case, it is not time to see but rather time to start picking up bargains. On the other hand, the trade war may go on forever, the dark comedy routine that is the US government with its recurring shutdowns may get worse. The Mueller investigation into Russian meddling in the US electoral process seems to be getting closer and closer to the President. The ever-mounting US debt will eventually require a devaluation of the US dollar, extraordinary inflationary measures by the Federal Reserve, of end up in long term damage to the US economy. Which direction will these issues take the market and how far will it fall in the next year or years?
The things to watch are earnings and employment. No matter what is happening in Washington, with the trade war, or with a volatile stock market, the intrinsic value of stocks is tied to forward-looking earnings and those earnings are tied to people having jobs and money to spend. The longer term will be governed by earnings. Use the stocks suggested by Kiplinger as a guide. Do your own fundamental analysis to choose investments for your own defensive investment strategy for 2019.
One More Defensive Investment Example
The Motley Fool looks at General Mills as an undervalued dividend stock with a 5% yield.
As concerns about tariffs and rising interest rates hammer the markets, many investors are pivoting toward defensive stocks that withstand market downturns better than higher-growth stocks. Packaged foods giant General Mills (NYSE:GIS) is usually one of those stocks but its 35% decline this year likely spooked conservative investors.
However, that sell-off reduced General Mills’ forward P/E to 12 and boosted its forward dividend yield to 5.2%. Do those figures indicate that it is now an undervalued income stock that has finally bottomed out?
General Mills is famous for the Betty Crocker brand of package baking products. Your mother and grandmother certainly baked Betty Croker cakes and muffins and used General Mills or Pillsbury flour when baking “from scratch.” Unfortunately for the General Mills business model, women rarely bake any more that the balance work outside the home with family chores. This fact is a detriment to the long term General Mills business model.
When you look at old stalwarts like General Mills and see that their stock has dropped in value, you need to ask why and make sure that you are not buying into a company whose long term business model as it risk. After all, it is profits and long term cash flow that give an investment its long term intrinsic stock value and not its well-known brand name.