Defensive Investing

At Wellth we practice defensive investing. This is more crucial and important in our latter working years as we get closer to retirement, and even more so early in retirement. Defensive investing is the practice of using multiple approaches and strategies to mitigate notable periods of market volatility and limit losses in extended periods of market drawdowns, and recessions. This also still allows investors to stay in the game and remain invested with meaningful upside capture depending on the approach.  There are several ways to invest defensively. Here are just a few..

Rules Based Strategies

These can follow a moving average and move your money to a safe harbor or risk off position in part or in whole depending on the algorithm and strategy when markets are notably bearish or an unforeseen correction occurs.  Conversely when markets come back online and improve, move your money back into the market to continue to capture upside.  The algorithm remains ongoing and concurrent whether markets move north or south.  The net effect generally is less volatility and turbulence; avoidance of extreme peaks and valleys in the market.

Floors and Buffers

Floor and buffers are now very common in the ETF and annuity marketplace.  They typically will offer a compelling risk trade to give you meaningful market upside up to a cap, while giving you a meaningful hedge on the downside limiting your losses in a meaningful market downturn.  A floor is essentially a stop loss and a buffer a protective zone.  Most floors and buffers are set at 10% but greater protection levels are available for those willing to accept a more conservative market cap.

Quant Models

After over 20 years in the industry, I have observed market periods where active management has outperformed quantitative models but there are also periods where quant models can be a great tool.  The major reason is human judgement; none of us know with great skill or precision how to time the market.  A good quant model can be worth its weight in gold and remove human judgement and emotion from the equation.   Quant models can also be helpful during periods of great market volatility.

Protecting Profit and Principal/Risk Shifting

You have come far and endured a few bearish scares in the marketplace, but you hung in there and stayed disciplined and stayed the course. You have recovered and grown your asset(s) meaningfully. You are now only a few years out from wanting to retire. Intuitively you know a major market downtown or protracted recession could be detrimental to your planning. You have assessed and concluded that locking in some of your profits and beginning to protect your principal more vigilantly is sensible and appropriate; shifting your more aggressive positions to less market correlated assets or safer investments like investment grade short term bonds and/or treasuries.

Remaining well diversified is always key. These approaches can be used collusively too depending on your outlook, circumstance and risk appetite. If you fall into this category and we have not had this discussion yet we should!

Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.  Therefore, no current or prospective client should assume that future performance or any specific investment, investment strategy or product will be profitable.