Why is it very Essential to have Defensive Stocks in ones Portfolio?

By | 26/09/2016

There is a famous saying “Better be safe than sorry”. One cannot make too many mistakes and live to tell the tale when he is investing in the stock market. Building a safety net under one’s portfolio is very essential and its true value is realised only in a recession. Fortunately a class of stocks called defensive stocks comes to one’s aid in recessionary times. In times of plenty, bad times are forgotten but a single bad day makes one forget all the days of plenty. It may be several months before a recession blows away and defensive stocks can give one peace of mind in these bad times.

What are defensive stocks?

  • One lives in recessionary times and it is time to tighten those purse strings. No more binging on parties and blowing money on movies. Time to cut down on beverages.
  • Surely one would not stop having a bath or skip his medicines just because it is a recession. One is expected to continue making his purchase of soap medicines and cosmetics and stocks of these Companies remain unaffected in a recession. Defensive stocks are basically stocks of Pharmaceutical Companies, FMCG’s and even IT Stocks which come into play in recessionary times.

When must one buy defensive stocks?

  • Surely the best time for one to buy defensive stocks is during a recession… Right….No of course not. At this time the bear market would have pushed the prices of defensive stocks to very high levels and purchase of these stocks at such elevated levels would result in one suffering a loss. Perhaps at the start of a bull run?
  • Wouldn’t one be better served if he were to invest his money in rapidly increasing and running away cyclical stocks such as banks, infrastructure and automobiles rather than defensive stocks which appear to go nowhere at this point in time?
  • The right answer is at the start of a downturn .The Bull Run is ending and one notices people all around are selling cyclical stocks and this is the time to stock up on the defensive stocks. Then just sit back and watch the prices of these stocks soar…
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