Do you want to protect your investments from the market crash?
Maybe you should consider stopping investing in overhyped stocks with huge fluctuation and investing in boring defensive stocks instead.
In a market crash, or a bear market, the stock price can dive 10% to 75% in a matter of weeks.
Sometimes, the stock market is like a roller coaster, cranking uphill for one minute, and diving down into the ground the very next minute.
High levels of volatility are common for “Hyped stocks”, stocks such as technology stocks.
To put it into perspective, if you have invested $1,000,000 into the stock market before the market crash, 9 months later, it is reduced to $250,000.
How To Protect Your Investments From The Stock Market Crash?
Investors protect their portfolios from a market crash by rebalancing their portfolios, diversifying into different assets, and investing in defensive stocks.
Most importantly, these smart investors understand the signs of a stock market crash and stay away from hyped stocks, because these stocks fluctuate widely based on the general consensus of the public.
When the stock market crash, these hyped stocks will react violently and drop like a brick.
The primary factor driving the price of hyped stocks are major financial news, investor reaction to company financials, or pricing speculation.
Smart investors protect their investments from the market crash by investing in defensive stocks.
And now in this article, we will be talking about the different types of defensive stocks you should invest to protect yourself against a market crash.
Read Also: 7 Deadly Sins of Beginner Investors
What Are The Different Types Of Defensive Stocks?
Defensive stocks are generally separated into 3 different types. These are companies whose product or service is always in demand.
Defensive companies are usually blue chip companies where pro investors buy to protect themselves from a stock market crash.
3 Types of Defensive Stocks:
- Consumer Staples – Essential products used by consumers such as; foods and beverages, household goods and hygiene products, etc.
- Healthcare – Company involved in products and services related to health and medical care such as; hospitals, clinics, nursing homes, pharmaceuticals, etc.
- Utilities – Essential services used by every household of the public such as; water, electric, gas, and broadband supply utilities, etc.
Read Also: Warning Signs of Stock Market Crash
1. Consumer Staples
Consumer staples are defensive stocks that produce products, or service that we need for our day-to-day life. These types of defensive stocks are the products that represent our basic ‘needs’ and not the ‘wants’ in our life.
Consumer staples examples
Food & Beverage
We need to eat and drink no matter the market condition that we are currently having.
It can be a bear market or a bull market, it just doesn’t matter.
If we don’t eat or drink, we can’t even survive.
Soap and toiletries are some of the basic essentials for us to take good care of our personal hygiene.
Imagine one week of not taking a shower, can you live with that?
Even if you can live for one week without showering, can your wife live with that smell?
(I guess, my wife will kick me off our bed if I don’t shower for even one day.)
Tobacco is in this category.
This might come to be pretty surprising to many readers, after all, tobacco sounds like a luxury product that doesn’t really fit the category of a need.
But have you seen a smoker going out from a shelter to have a puff on a rainy day because it says ‘No Smoking Indoors’?
In fact, it is pretty common for me to see a few smokers smoking under the rain with an umbrella because they are not allowed to smoke indoors.
To smokers, tobacco is more of a need than just a want.
They need tobacco to live their day-to-day life.
Consumer Staples as Defensive Stocks
Defensive stocks are companies that produce consumer staples.
It includes not just the products and services that people cannot cut back on during a market downturn, such as food and hygiene products.
Consumer staples include products that people are unwilling to cut back on for some other reasons.
Healthcare stocks are one of the best defensive stocks. These stocks are the basic essential for all of human life.
Not only we can’t live without it, but it is the basis of why are we even alive.
From the day we are born to the day we die, we rely on healthcare, we need healthcare to ensure we are healthy and able to go about in our day-to-day life.
It is not a question of, ‘do you want to be healthy, it is simply, ‘we need to be healthy to be alive.
This is what we are most familiar with and probably have used this service at least once a year.
These are the hospitals and clinics you visit when you are having the flu or are feeling unwell.
No matter the market condition, if you are feeling unwell, you will probably go and see a doctor right away.
Although many of the hospitals are run by the government, there are a few that is run by private company whose stocks can be purchased from the stock exchange.
This gives you a great opportunity to participate in the growth of healthcare in your country, or even internationally.
Ever heard of Pfizer, Johnson & Johnson, GlaxoSmithKline, Novartis, and Merck, these are just some examples of the mega pharmaceutical companies that produce the medicine you eat after you see the doctor.
Without these pharmaceutical companies, there will be no medicine. And having no medicine can be a life-threatening problem.
If you are young, you may be able to get well yourself from the mild flu, or a slight headache by resting and drinking lots of water.
But there are patients who are diagnosed with cancer, diabetes, or asthma, they can die if the medicine is unavailable.
These big pharma companies research and develop life-saving healthcare products which are essential for saving lives.
Vaccines, cell therapy, and many other new forms of medicine come from these companies.
Similar to pharmaceutical companies, Biotech companies create medicine that helps save lives.
Medicine derived from a Biotech tech company is developed from living organisms. Companies such as Amgen, Horizon, and Immunocore are such examples of Biotech companies.
Without these companies, there will be no vaccine that has saved millions of lifes or helped prevent you from falling sick.
These are the companies that help to manufacture surgical devices and requirements for hospitals and clinics to use.
Ranging from the pair of surgical gloves, or the mask that the doctors wear, to the million-dollar machinery which helps to monitor the patient’s condition during the operation.
Medical devices are the ‘heart’ of all surgical and healthcare advancement that makes the current healthcare system so robust and safe when compared to decades ago.
Some examples of such companies are, Medtronic, DePuy Synthes, Edwards Lifesciences, and Baxter.
Healthcare Stocks as Defensive stocks
The healthcare sector doesn’t only consist of stocks like hospitals and clinics, but also the related stocks which help to support the healthcare system.
Healthcare is the basic essential to help support life, thus will be minimally impacted when the stock market crash.
Read Also: Ways to profit from a Market Crash
Utility stocks are the staple of defensive stocks. Often, it is called the basic needs of modern society.
You may not think of them every single day, but you need to use them for your everyday life.
Imagine the panic you have because you have forgotten to bring your hand-phone when you go out.
It is a basic necessity that you don’t realize you are even using them.
Utilities Stocks Examples
You twist the knob and you see fresh, crystal-clear water flowing out magically from the tap.
You use the water from the time you open your eyes till when you sleep comfortably in your bed. You use the water for drinking, washing, bathing, cooking, etc.
Now imagine the stock market just crash.
Will you stop using water every day?
Water will be the last thing on your mind that you may want to cut back on.
You may want to cancel the trip to Hawaii or stop eating out ever so often. But you will probably use the water the same way you have been using it because it is a basic necessity for you to go about your day-to-day life.
Ever have experienced a blackout where all electronics cannot be used?
Electricity is what defines us as a modern human society.
Almost everything we use requires electricity.
The air con we are currently enjoying, the handphone, or computer we are currently using to read this article need electricity to operate.
Without electricity, our life can be really boring and uncomfortable.
Imagine a warm and humid night without lights and air-con.
You will have to live in total darkness with your sweat perspiring onto your clothes due to the heat.
I don’t think that will be a very comfortable feeling, don’t you think?
Gas is pretty much a basic requirement for most households, you need it for cooking and most importantly, to enjoy that hot bath after a long day of work.
Of course, you can burn some wood and have a nice barbecue once in a while, or have a cold shower during the winter.
But it will be much easier and more convenient if you can just turn on your stove to cook a meal and have a nice warm bath during a cold chilly winter.
Utilities as Defensive Stocks
Utility stocks are considered one of the most commonly known defensive stocks.
These are the things that we can’t live without even for a day. Different utility stocks combined to make our utility system.
For most human civilizations, the availability of a good utility system is what makes us modern humans.
A great utility system become even more important for developed Countries such as; the United States, the United Kingdom, Australia, Japan, and Singapore, a day without a proper utility system will cause a major problem in our day-to-day life.
Read Also: How to prepare for a market crash by age?
Why Defensive Stocks Can Protect You During A Stock Market Crash?
Defensive stocks are typically companies that offer goods or services that people continue to buy even when the economy isn’t doing well. These stocks will provide a consistent return even during an economic or market downturn.
Those who are safe from the market crash are those investors who are invested in the ‘boring’ defensive stocks. Although, the stock market crash might still impact these defensive stocks.
Generally, defensive stocks will be able to recover quickly as the market recovers.
Why Do I Like To Invest In Defensive Stocks?
Defensive Stocks are great stocks to invest in, especially if you want to protect yourself from a market crash. Buying a defensive stock may not sound as sexy as buying the latest tech stock (Tesla I am looking at you).
A defensive stock is one of the best protection against a stock market crash. A balanced portfolio with defensive stocks can prevent you from losing half of your portfolio during a market downturn.
Furthermore, with your capital protected, you can use your capital to buy stocks when the market is cheap.
Most importantly, the low volatility of the defensive stocks allows you to have a better sleep at night, which can be good for your health and even better for your heart.
Here are the 3 main types of defensive stocks:
- Consumer Staples
Next, if you are interested, let’s deep dive into the characteristics of defensive stocks.
But before that, you can also check out some of my other articles on investing.
Successful investors like Warren Buffett read approx. 500 pages a day.
Knowledge is what differentiates a successful investor from a gambler.
Successful investors like Warren Buffet are successful because they have the right knowledge to make the right decision to buy or sell a stock.
Knowledge of investment can be learned from books or articles like this one.
“Education is a progressive discovery of our own ignorance.”Will Durant
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