Defensive Investing School
I recently wrote an article titled defensive investing where I outlined the basics of defensive investing. This article goes more in depth. I’m going to list the defensive and offensive strategies with investing below and then list applicable examples.
Defensive strategies
Cash and bonds
Index Funds
Large Cap Stocks
Leverage products to the upside
Long call options/Options to the upside
Buying 25 to 75% off the all time high
Diversified portfolio
Dollar cost averaging
Offensive Strategies
Call opinions to the upside with a short expiration date
Leveraged Products to the downside
Put options/Options to the downside
Concentrated portfolio
Holding cash is the ultimate defensive play. Yes cash is a position. After that it’s buying index funds. Index fund is a defensive investment due to diversification. There are a lot of investors who diversify by holding 30 to 100 different stocks, but with an index fund you can own thousands of stocks. Buying index funds also has to be performed defensively by buying them 25% to 75% below the all time high if you can or just dollar cost average with buying. Investing in index funds is most effective when done with a little bit of offense. This offensive strategy is called concentration. That’s right buying hundreds or even thousands of shares of one index fund gives you the offense of a Mike Tyson punch with the defensive footwork of Floyd Mayweather. This is the secret of the Simple Path to wealth that is outlined by JL Collins in his book. You concentrate your investments to build wealth more aggressively and diversify to stay wealthy.
The next less defensive strategy is buying large cap individual stocks with a good moat and meaning at 25 to 75% off the all time high. This too works well when paired with a concentrated portfolio. Dave Ramsey is a fan of these and calls them blue chip stocks.
The next on the list is buying leveraged ETF to the upside at 50% to 90% off the all time high. This too works best with a concentrated portfolio. This is also more of a swing trade and not suited for long term holding. You need to know your exit price with these investments.
The next less defensive investment strategy is buying long call options with stocks that have dropped 25% to 75% off the all time highs. This is best done with option contracts performed on large cap stocks with a good moat and meaning. This is best done with contracts with expiration dates of 1 to 2 years out.
The remaining strategies are so low on the defensive list I’m going to call them offensive strategies because it leaves you wide open for a knock out punch. With these strategies the focus is on limiting your losses AKA focusing on defense. The upside takes care of themselves. When you win ,you win big, but you just don’t want to lose big and be out for the count.
The first offensive strategy is shorting the market using leverage ETFs and other leverage products to the down side. You would again buy at 50% to 90% off the all time high. This is also a swing trade and not meant for long term holds. You must know your exit price.
The next offensive strategy with more upside and risk is shorting the market with options. You must know your entry and your exit price by using technical analysis.
Conclusion
Up is the overall trend of the market and you make the majority of your money betting on the upside. The best strategy is to focus on defense with a few offensive moves when the opportunity presents itself. If I have the opportunity to make a defensive play vs. an offensive play, I would take the defensive play all day long. I would rather sit on cash and wait for my index fund or large cap stock to drop 25% from the all time high or just dollar cost average into them. I would sit on cash so that I have the opportunity to buy a leveraged ETF or other leverage products to the upside when it falls to 75% from the all time high. Now this may only happen every 10 to 15 years, but when it does, I want to be ready. This is the exact reason why Warren Buffet sits on all that cash. He’s waiting for an opportunity to become a less defensive investor.
https://thefireinvestor.com/2023/01/27/defensive-investment-strategies-part-2/?amp=1
