Using Defensive Stocks to Recession-Proof Your Portfolio

A man puts his hand between upright dominoes and dominoes that are falling. — (Image credit: Getty Images)

In the face of economic headwinds, investors are looking to strengthen their portfolios and protect against market instability. One option to consider: defensive stocks.

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Though it may seem like a difficult time to start showing the investing ropes to young people, it’s actually more important than ever that beginners have the financial tools and education to manage their money and make smart financial decisions. A report released by the Milken Institute found that many high school students lack even basic financial knowledge and skills, and a survey from the London Institute of Banking and Finance found that a majority of young people said they would like to start learning about money between the ages of 11 and 14.

As young people turn into income-earners and eager consumers, it’s critical that they feel empowered to build wealth and create financial security. And as beginners and experts alike look to recession-proof their portfolios, the term “defensive stocks” is sure to arise.

What Exactly Are Defensive Stocks?

Part of what defensive stocks do is right there in the name. They are stocks that are known to defend against uncertainty, providing steady earnings and consistent dividends regardless of the way the stock market and economy are performing overall. Due to their stable performance and consistency, these stocks tend to be insular from business cycles and are more recession-proof than typical stocks. Also known as “non-cyclical stocks,” defensive stocks protect portfolios against losses.

Defensive investments are typically established companies that serve basic human needs or prioritized desires, offering goods and services that are indispensable to consumers and therefore always remain in demand. They may not offer huge gains in comparison to more aggressive stocks, but defensive stocks could be considered a safer investment in times of market turbulence.

Let’s dive into the details of why you should look to defensive stocks at any stage of your investing career.

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Minimized Risk

There is no such thing as a risk-free stock, and with all trading comes the possibility of risk and losses. However, these types of stocks have comparatively less risk than aggressive stocks. They’re less likely to drop in value when there are events that trigger an economic downturn thanks to their steady nature and low volatility.

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In a recession, defensive stocks can protect you from further losses. Experienced investors, risk-averse investors and beginners alike may choose to protect their portfolios with these “shields.”

Predictability

Defensive stocks are minimally volatile, and therefore it can be easy to predict how these stocks will perform. Returns made on defensive stocks are usually stable and slow-going, enabling you to predict how their investments will perform over time. This slow and predictable steady growth gives particular value to defensive stocks if you are working toward retirement or specific financial targets.

Beginner-Friendly

The very nature of defensive stocks makes them especially welcoming for new investors, investors who dip in and out of trading or investors who may not be as well versed in stock market trends. Predictability and consistency allow new and learning investors to get a sense of how the markets work without fear of substantial loss. And this is even better if you are a child or teen dipping your toe in investing for the first time, as defensive stocks might actually be one of the best ways to start building your assets in your portfolio.

A great way to empower young users to learn the ropes, have fun and understand the markets risk-free is by using the tool Invstr Jr, an investment app curated just for kids. This enables young investors (under 18) to open investment accounts at the click of a button, have gamified and virtual learning experiences and makes investing fun and safe for the whole family. Parents are able to easily supervise their child’s account, schedule monthly deposits, set allowances for completing goals and approve or decline investment proposals.

Where to Invest

When it comes to picking defensive stocks, turn away from what might be considered “hot” or trending and instead look to the basics. Of the 11 U.S. sectors, healthcare, utilities and consumer staples often contain the best defensive stock picks. Each of these sectors provides goods and services that are either an absolute necessity, such as medical services, heating and water, or have been deemed a consumer indispensable, such as tobacco or Coca-Cola products. The consistent demand for many of the companies in these sectors make them a fantastic defensive stock option withstanding all economic periods.

While you may have to do some research into what sectors, companies and defensive investments are right for you, the bottom line is that defensive stocks will typically perform well despite changes in the broader market.

And if you’re looking for stocks that might be suitable for your child’s portfolio, defensive stocks could be a great option that provides minimal risk.

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Like everything, balance is key, and in combination with other strategies, defensive stocks are a recession-proofing tactic that can be employed by experienced and beginner investors alike.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Kerim Derhalli is the founder and CEO of Invstr, an award-winning financial education and investment app. Invstr’s mission is to empower everyone to take charge of their financial future. Invstr has been downloaded over 1,000,000 times by users in over 220 countries. Prior to Invstr, Derhalli built a 30-year career building, growing and managing multibillion-dollar businesses at leading financial institutions all around the world.