The pros and cons of investing in defensive stocks

Julie Brownlee, Fsp Invest, 20 Oct. 2015

Tags: defensive stocks, investing in defensive stocks, what are defensive stocks, advantages of defensive stocks, disadvantages of defensive stocks,

Shares on the stock market tend to fall into two categories: Defensive and cyclical.

Cyclical stocks have a habit of depending on what’s going on in the economy whereas defensive stocks tend to do the opposite.

So what are the advantages and disadvantages of investing in defensive stocks?

Let’s take a closer look…

What are defensive stocks?

Defensive stocks are those of companies that don’t tend to depend on what’s going on in the economy. These companies’ products are in demand regardless of whether the economy is booming or shrinking.

Examples of defensive stocks include food retailers and pharmaceutical companies

So-called ‘sin’ stocks also tend to be quite defensive. These include tobacco and alcohol companies. This is due to these products seeing quite stable demand.

In offshore markets, utility stocks (which are government-owned in SA) also tend to do well as consumers will always need water, gas and electricity.

The ups and downs of defensive stocks

When there is concern about what’s happening in the economy or an economy is under pressure, defensive stocks tend to be more popular. This is because investors see their sales and earnings as more reliable.

But when the economy is doing well, defensive stocks can suffer as investors move into growth stocks, such as cyclical stocks.

When it comes to holding defensive stocks in your long-term portfolio, to achieve a diversified portfolio, it’s a good idea to hold some defensive stocks. These will help the performance of your overall portfolio during times of economic uncertainty.

There are also unit trusts that focus on holding defensive stocks if you’d rather not pick individual stocks for your portfolio.

So there you have it. The pros and cons of investing in defensive stocks.

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