A Look at Some Defensive Strategies for the Expensive Market
Defensive strategies could help you stay safe in spite of all that could happen when the market gets pricier.
Stock trading and investing aren’t about taking random shots in the dark hoping they would hit the target. There are strategies at play here. While traders are often driven by emotion, the successful ones follow a pattern that could sometimes change based on the direction the market is heading. Successfully mastering strategy is essential to make the right moves.
Pricier Market Demands a Defensive Strategy
Could the defensive strategy be the right one for the current market situation? Motley Fool’s Matthew Frankel believes so because the general expert view is that the stock market is really quite expensive now. Historically the market now is probably as expensive as you’d have ever seen it, if some of the metrics are checked, as this article by Frankel reports.
While the natural reaction to an expensive market is to sell, Frankel believes that’s not necessarily such a bright plan. A better idea would be to put your focus on defensive stocks if you’re looking to invest in new capital.
What Are Defensive Stocks?
Frankel considers “defensive stocks” as businesses that are just about stable despite the vagaries of the economy. Utilities, telecom sector stocks, REITs, etc are high dividend stocks that come under this category of defensive stocks. These stocks deal with services and industries that are always in demand. Their dividend yields are also above average, enabling them to outperform their non-dividend paying rivals through the tough times.
Frankel also quotes the example of Walmart ($WMT). Though the largely brick-and-mortar retail giant has had to improvise as a result of the disruption brought about by Amazon ($AMZN), it is managing to maintain customer interest in all situations. Its customers have a great deal of money to spend while the times are good, and during the tough times they have new customers looking to cut back on the expenses and buy less expensive stuff. During the time of the Great Recession, Frankel points out that Walmart actually had a growth in sales.
Strategies for Buying Defensive Stocks
Now let’s look at ways to buy these stocks. Dollar-cost averaging is something Frankel suggests when you feel your intended stocks are getting really heated up in demand. The idea of dollar-cost averaging is that you decide to invest a particular dollar amount at a particular time interval for building a position over a period of time. It isn’t investing in a stock all at once. This helps you to get an average entry price that is quite favorable. And if you find the market dropping, you can buy the remaining position or some of it at the new prices that are lower.
Frankel also recommends having the majority of your portfolio invested all the time. But if the market appears to be expensive and it’s harder to find attractive opportunities for investment, you can accumulate more cash in your portfolio than usual. The basic idea here is that you need some cash with you if some correction or even a crash occurs in the market and you need to benefit from the resultant lower stock prices. But you still want most of your money in a long-term investment because you can’t time the market accurately and you want to take advantage of any upside that could happen before the market goes through a fall.
Strategies Not to Employ
Frankel believes that you shouldn’t sell your stocks just because you believe the market is getting too expensive. While the increasingly expensive nature of the market is likely to result in a correction, the stock market could also potentially rise further before the correction occurs.
Another defensive strategy is to not invest with borrowed money, since you never know how much the stock price could drop and you could be left with just the borrowed money which you need to return.
Employing defensive strategies prepares you better for whatever happens as the market keeps getting pricier. A market crash or correction isn’t always spot on to predict. You need a good broker and a good system to take advantages of the market volatility. TradeZero provides direct market access trading and free commissions.
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