Defensive stocks are boring, so why should you even invest in them?
When making money is concerned, being boring does not mean it makes you less money.
On contradictory, buying a boring stock can save you from losing millions of dollars.
In a bear market, or more commonly known as a market crash, stock price can dive 10% to 75% in a matter of weeks.
This high level of volatility are common for most of the ‘exciting’ stocks such as technology stocks during a market crash.
During the Dot Com Bubble in year 2000 most internet stocks experienced an massive 75% fall in price, that wipe out $1.755 trillion dollar from the stock market.
To put it into perspective, if you have invested $1,000,000 into the stock market before the market crash, 9 month later after the stock market crash, you can now be worth $250,000. The investor lost $750,000 in just a few months.
Those who are safe from the market crash are those investors who are invested in the ‘boring’ stocks. Although, the stock market crash do impact them slightly, they are able to recover quickly after the crash and invest when the stock market is on sale.
These so-called ‘boring’ stocks they invested are called 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.
3 Types of Defensive Stocks
Defensive stock are boring, but they are the stocks that pro investors buy to protect themselves from a stock market crash. Learning about these few types of defensive stocks and understanding each of the stocks can help you to make great decision when protecting your investment.
Here are the 3 Types of Defensive Stocks:
- Consumer Staples
1. Consumer Staples
Consumer staples are defensive stocks that produce products, or service that we need for our day to day life. Basically these type of defensive stocks are the products which represents our basic ‘needs’ and not the ‘wants’ in our life.
Consumer staples stocks can be categorized into the following:
- Food & Beverage: We need to eat and drink no matter of 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.
- Hygiene products: Soap and toiletries are some of the basic essentials for us to take good care of our personal hygiene. Imagine one week not taking a shower, can you live with that? Even if you can live with one week without shower, can you wife live with that smell? (I guess, my wife will kick me off our bed if I don’t shower for even one day.)
- Addictive Products: Tobacco is one of those products 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 to the category of a needs. 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 allow 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.
Defensive stocks that are companies that produces consumer staples. It includes not just the products and service that people cannot cut back on during a market downturn, such as food and hygiene products, but it also includes products that people are unwilling to cut back for some other reasons.
Healthcare stocks are one of the best defensive stocks. These group of stocks are the basic essential for all of human life. No only we can’t live without it, it is the basis of why are we even alive. From the day we are born to the day we die, we rely on the 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’.
Healthcare stocks can be categorized into the following:
- Healthcare Service: This is what we are most familiar, and probably have used this service at least once a year. These are the hospitals and clinics you visit when you are having a flu or 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 hospital are run by the government, there are a few that is run by a private company which their stocks can be purchased from the stock exchange. This give you a great opportunity to participate in the growth of the healthcare in your country, or even internationally.
- Pharmaceutical Companies: 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 maybe able to get well yourself from a mild flu, or a slight headache by resting and drinking lots of water. But those patient who are diagnosed with cancer, diabetes, or asthma can die if their medicine is unavailable. These big pharma companies research and develop life-saving healthcare products which is essential for saving lives.
- Biotechnology: Vaccines, cell-therapy and many other new forms of medicine comes from these companies. Similar to pharmaceutical companies, Biotech companies create medicine that help save lives. The difference is, medicine derived from a Biotech tech company is develop 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 have saved millions of life, or to help prevent you from falling sick.
- Medical Devices: These are the companies that helps 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 is the ‘heart’ of all surgical and healthcare advancement that make the current healthcare system so robust and safe when compared to decades ago. Some example of such companies are, Medtronic, DePuy Synthes, Edwards Lifesciences and Baxter.
Defensive stocks that are in the healthcare sector don’t only consist of stocks like hospital and clinics, but also the related stocks which help to support the healthcare system.
Healthcare are the basic essentials to help support life, thus will be minimally impacted when the stock market crash.
Utilities stocks are the staple of defensive stocks. Often, it is called the basic needs of the 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 which you don’t realize you are even using them.
Utilities stocks can be categorized into the following:
- Water: 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 everyday? No. Water will be the last thing in 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, because it is a basic necessity for you to go about your day to day life.
- Electricity: Ever have experience a blackout where all electronics cannot be used? Electricity is what defines us as the modern human society. Almost everything we use requires electricity. The air con we are currently enjoying, the hand phone, 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: Gas is pretty much an basic requirement for most household, 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 a while, or have a cold shower during the winter. But it will be much easier and 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 stock are consider one of the most commonly known defensive stocks. Different utility stocks combined to make into our utility system. These are the things that we can’t life without even for a day. For most human civilization, availability of good utility system is what make us the modern humans. A great utility system become even more important for the developed Countries such as. United States, United Kingdom, Australia, Japan and Singapore, a day without proper utility system will cause a major problem to our day to day life.
Defensive Stocks are great stocks to invest, especially if you want to protect yourself from the market crash. Buying a defensive stock may not sounds as sexy as buying the latest tech stock (Tesla I am looking at you).
But a defensive stock can prevent you from losing half of your portfolio when the stock market crash. This protects your capital, which is important if you want to buy stocks when the market is cheap.
The lower volatility of the defensive stocks also allows you to have a better sleep at night, which can be good for health and even better for your heart.
Here are the 3 main types of defensive stocks:
- Consumer Staples
Next we shall look into some of the characteristics of a defensive stocks.
But before that, you can also check out some of my other articles on investing.
Knowledge is what differentiate a successful investor from a gambler. Successful investors like Warren Buffet is successful, because he have the right knowledge to make the right decision to buy or sell a stock.
Combined with the right investing knowledge and your advantages of being young. You have the potential of getting a nice profit from your investment.
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Ultimate Stock Market Crash
Part 1: Signs of Market Crash
Part 2: How to Prepare for Market Crash
Part 4: How to Profit from Market Crash
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