Why defensive investing is a good idea for most of us?

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?
Recently published:
Investing or speculating in properties?

Investing or speculating in SG properties. ABSD nightmare!

Over the years, I have talked to myself about real estate and my philosophy.

With the Additional Buyer Stamp Duties (ABSDs) increased by quite a bit, a reader asked for my thoughts on the property market in Singapore now.

Regular eavesdroppers on AK would be able to guess the response.

My philosophy has not changed.

If we are investing in real estate, just like investing in stocks, we want to invest in an asset that, after expenses, will generate a meaningful income for us.

If we buy real estate thinking that the price of the asset will rise in the next few years and that we would be able to flip it for a profit, that is not investing.

That is speculating.

Usually, I would stop here.

However, for quite a few years now and it has gotten a lot worse, we have people buying real estate in Singapore not to generate any income nor to flip for a profit.

They simply want Singapore properties as a store of wealth because of the strong Singapore Dollar and the politically stable environment.

They are mostly foreigners.

Wow! 

So many ultra rich foreigners!

From which countries?

You ask, you answer.

I am not going there.

I have said before that when we buy a property, we want to ask 2 questions.

1. It is not just a question of affordability but we should also ask if it is value for money.

2. Do we have deep pockets for if things go wrong and many things could go wrong.

However, to these very rich people, these two questions are most probably irrelevant.

So what if the properties don't make money or if they should even lose money?

If the ultra rich are able to protect a big fraction of their wealth, they would still be very rich and that could be more than enough for them.

For the rest of us, we really have to stay grounded and not be swept away by barbers telling us we need to have more frequent haircuts even if we are  going bald.

Now, for those who bought properties in Singapore recently thinking they could flip them a few years later at higher prices, the much higher ABSDs announced might have turned those dreams into nightmares.

The government of Singapore wants properties to be sold mostly to genuine owner occupiers because housing affordability is a big issue.

Singapore welcomes foreign direct investment but we do not want foreign direct speculation.

Hence, the recent strengthening of property cooling measures.

For those of us who are still thinking of investing in properties for passive income in Singapore in spite of the ABSDs, I would go back to those 2 questions I said we should be asking.

Cannot remember?

Scroll up and take a screenshot.

Nightmares do not discriminate between speculators and investors.

This is a fact.

Pay a price too high and we could have a high price to pay in future.

Anyone who is not ultra rich but wants to be a real estate investor in Singapore might want to read the related posts below.

Related posts:
1. Condo investment has been a drag.
2. This condo has also been a drag.
3. Investment philosophy and properties.
4. Two questions we should ask.
5. Affordability and value for money.