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What’s up guys!
How’s everyone’s week been! December is here, can you believe it?!
I know I can’t, was only just remarking to MrsFrugalSamurai that I don’t feel like I achieved anything at all this year.
Then she not-so-subtlely reminded yours truly that we did GET MARRIED this year.
“It’s what happens when I’m with you babe, time just flies”, is what I was obviously thinking but didn’t quite say out loud.
Which brings me to the topic of today’s post, Step 5 of a continuation on my friend’s Light Beam question:
“How to survive a bear market”
Step 5 – Hindsight Risk
Actually, hindsight risk is just a fancy term translated as “What I should have done but didn’t”.
This is especially true looking back in the aftermath of Bear Markets.
Ever wondered how those squillionaires and gazillionaires made their money?
By buying low and selling high of course!
And the best time to buy is when everything is on sale (through bear markets), be in it stocks, bonds, housing, chocolate milk, hunchbacked hitmen, whatever it may be – prices retreat to mouthwatering levels.
Though not just buying anything – really picking your investments.
But TheFrugalSamurai, how do you pick a winner?
Typically capital preservation during bear markets is paramount – that is taking a leaf out of Mr Buffet’s book, number one lesson in investing is to not lose money (number two lesson being don’t lose money).
As such if we dare to venture out into the big bad bear market – we must be smart.
This is where we introduce the concept of “Defensive Stocks”.
The stock market is a herculean beast – there are a multiple of different sectors and multitudes of stocks in each sector.
But there’s certain areas of the market which plod along no matter how the overall stock market is doing.
This is the defensive sector.
Mind you, not defense as in guns, ammunition and nuclear missile manufacturers etc, no those are labelled “dictator stocks”.
I mean defensive in the sense that they provide:
“…A constant dividend and stable earnings regardless of the state of the overall stock market. Because of the constant demand for their products, defensive stocks tend to remain stable during the various phases of the business cycle”. (Investopedia).
Think areas such as Consumer Staples – yknow the Woolworths, Coles, Walmart’s and the like.
Just because the market is down and we might be going through a recession, doesn’t mean I will stop buying toilet paper yknow? Things must be TOUGH if people stop buying toilet paper… Jayzuz.
Or utilities companies – the gas, water, energy providers.
People still take SHOWERS during bear markets don’t they? I mean sure, we might want to reduce our water bills, but I think it’s safe to say that we will still maintain a sense of personal hygiene during down periods.
Or healthcare firms – influenza and bronchitis don’t care how the stock market is doing. If you’re sick and need medicine, you go to get it.
So for those of us who aren’t content with a simple dollar-cost averaging strategy during a bear market, and want to capture a bit more upside growth, have a real hard look into the defensive sectors.
They are usually typified through strong cash flows, strong operations and a mature market. Defensive stocks tend to have a higher dividend yield, which helps during periods of market downturn.
This gives them the ability to weather most economic conditions.
Please note that during the GFC, every sector got crushed, irrespective if it was defensive, offensive, passive, sensitive, intensive, apprehensive – whatever.
Methinks, there’s a place for defensive stocks in everyone’s portfolio – usually because they are at the lower end of the risk curve compared to other more regular stocks, and would take a significant calamity to upend their business model.
Mind you, there is still risk with them – all investing carries an element of risk, but it’s about trying with what we have to squeeze that little bit of extra juice out right?
After all – remember rule number one, never lose money.
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P.S. The examples I used here mostly apply to the stock market, but that doesn’t mean you can’t take them into other asset classes – housing, bonds, hunchbacked hitmen, world is your oyster!