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If you have been following my blogs, you would be familiar with my reminder to myself that in the current environment, it is probably not a bad idea to be more defensive as investors.
The heightened geopolitical tensions in many parts of the world, sticky inflation, higher for longer interest rates, slowing economic growth and the prospect of economic recession in major economies make for a troubling brew.
I have also said that as a retiree investor for income, it really makes more sense for me to be more defensive and seek out capital preservation options, reducing beta or volatility in my portfolio.
When interest rates were very low, there were people who would borrow money to invest in real estate investment trusts and thought they were actually investing defensively.
Why?
An idea in defensive investing is to invest in assets which deliver stable earnings and meaningful dividends and real estate investment trusts, for the most part, looked like a good fit.
However, these investors who were borrowing money to invest in real estate investment trusts were not investing defensively.
What they were doing was actually aggressive and would fall in the same class as margin trading and options trading.
If interest rates were to rise rapidly which they did, they could find themselves in a boatload of trouble as the unit prices of real estate investment trusts fell and cost of financing rose.
What they were doing had little difference with borrowing money to invest in Alibaba's common stock.
If the price of the common stock fall below a certain price, the lenders will come knocking which was what happened to some investment "gurus."
I never want to have to deal with such a possibility which is the reason for the word "bread" in "eating crusty bread with ink slowly."
If you are new to my blog and don't understand, I will leave a link to the relevant blog below.
Now, is defensive investing only good for retirees like AK?
I would argue that defensive investing is probably a good idea in varying degrees for people who do not have deep pockets.
For regular folks who still need their earned income, capital preservation should have a place in the overall scheme of things.
For retirees and people who do not have the ability to stomach big financial losses, their investment portfolio should be more defensive than not.
The ability to stomach big financial losses will vary from person to person.
How defensive an investment portfolio should be should have an inverse relationship with the ability to stomach big financial losses, theoretically.
The more able a person is able to take big losses, the less defensive his investment portfolio could be, therefore.
However, I have often seen people who are ill able to take big financial losses adopting very aggressive investing ideas.
I think they should ask themselves if they liked the idea of living next to an active volcano.
Defensive investing is also a good idea for people who are mentally unable to take big financial losses.
Losing sleep because you lost a few thousand dollars in a recent investment?
Well, then, you might want to do more defensive investing.
How do we do defensive investing?
I will not tell anyone what to invest in but I will say this.
As long as we invest with an eye on capital preservation, minimizing the risk of financial losses, we are taking a step towards defensive investing.
Promises of astronomical growth and future returns from businesses which are burning cash do not interest defensive investors.
Thinking of becoming more defensive in your approach to investing now?
If AK can do it, so can you!
Related posts:
1. "Eat crusty bread with ink slowly."
2. Update on saving for income.
3. More in equities or fixed income?
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Investing or speculating in properties?
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6 comments:
Hmmm, I intent to goes into semi-retire mode in a few years. No no! I'm not that old yet to draw CPF. LOL. Just wanna tone down from current workload and do something less stressful. I have been exploring ways to reduce my exposure to volatility by building a more defensive portfolio like putting some of the soldiers to other platforms like fixed deposits etc. Much like transferring my armies from a wooden castle (High risk from being breached and burned) to a solid brick castle (More resilience) . while still keeping a reserve armies to attack the market when the price is right.
And we got our good old CPF as backup. :)
Hi TDT,
Your strategy resonates with me.
Unless we are very rich, especially in this current environment, it is not a bad idea for most of us to reduce beta or volatility by varying degrees in our investment portfolios.
Hope we are not having some heavy duty confirmation bias here. ;p
So, we same same but different as you still plan on being partially gainfully employed while I am gainfully unemployed. LOL.
Hmm. That sounds like something I should blog about next. ;)
Hi AK,
I viewed your blog from time to time and I would say I agree with your points in 99%. What is the 1%? It is what you said option trading is kind of aggressive like margin trading. Indeed it is yes and no. Option trading is no doubt margin trading which involves leverage that is a doube-edged sword. However people got hurt even if just with knives. The key point is not the leverage involved in margin trading but whether one can really master it. Who does not use leverage when buying a home., ie., mortgage which margin is in play. On the other hand, option trading, despite a derivative, is not that risky again if one can really master the essence of the trade. Being a retail option trader for decades, this is my words of experience. Just one rule, bite what one can chew.
Hi Shiva,
Don't bite off more than we can chew.
That is something I can agree with.
People do choke and some choke to death, unfortunately.
Thanks for sharing your thoughts. :)
AK Shifu,
Now we know who are swimming naked as the tide goes out.
https://www.bloomberg.com/news/articles/2023-05-02/pacwest-western-alliance-lead-regional-bank-stock-rout
Hi C,
Thanks for sharing the article. :)
So shameful to swim naked. ;p
Uncle Buffett and Uncle Munger are right!
The banking crisis is not over yet!
PacWest Bancorp and Western Alliance Bancorp led a deep selloff in regional lenders Tuesday, as renewed fears over the health of the financial system hit Wall Street after the second-largest US bank failure ever.
Trading in both firms triggered multiple volatility halts as PacWest fell 28% to close at a record low while Western Alliance tumbled 15%. The pair has shed more than $5 billion in market value so far this year. The KBW Regional Banking Index dropped 5.5% on Tuesday, the most since the crisis that engulfed Silicon Valley Bank in March.
Charles Schwab Corp., a brokerage with a banking arm that’s come under pressure in the recent rout, fell 3.3% amid the broader selloff in financial stocks. Comerica Inc. and Zions Bancorp. each tumbled more than 10% while Metropolitan Bank Holding Corp. dropped 20%.
The turmoil comes a day after JPMorgan Chase & Co.’s Jamie Dimon said the current banking crisis is nearing its end after his bank’s purchase of First Republic, though he acknowledged it’s possible another small lender could fail. The regional bank gauge is already down 28% so far this year.
“The resolution of First Republic helps to ease concerns but not eliminate them,” Wells Fargo & Co. analyst Mike Mayo said in an interview. “A triple dose of negative sentiment is impacting the regionals: commercial real estate, diversification and regulation.”
“Wall Street is wondering which bank could be the next one that needs a rescue and that is making it easy to pick on the other regional banks,” said Edward Moya, Oanda senior market analyst. “It looks like JPMorgan’s deal for FRC gave us one day of calm for the banking sector. Regional banking stocks are still looking vulnerable until we see clear signs that emergency lending programs can go away.”
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