Pros and Cons of Defensive Stocks
February 9th, 2010 at 10:30 am Posted by The Dean
Have you ever heard of defensive stocks? It pays to take more notice of them, especially in times that are hard and normal stocks are decreasing in value. Defensive stocks are so called because they have the ability to withstand hard times much more easily than other stocks that can be more vulnerable. A good example of a defensive stock is a utility, because this is something we all need regardless of what the economy might be doing.
Of course defensive stocks have pros and cons just like any other stock, so it pays to know more about them before deciding how to proceed. One of the main advantages is that if you invest in defensive stocks you are less likely to be affected by what happens in a recession. They may go down marginally in value but it isn’t likely to be too much.
On the other hand, defensive stocks can also fail to appreciate much in value because they are so steady. If you are looking to make a healthy profit in the stock market, defensive stocks are not the best things to invest in because their values aren’t likely to increase dramatically.
But then again, they can be considered a safe haven for many investors to flock to in hard times. When businesses are going under because of difficult economic conditions, you certainly don’t want to be holding positions in those companies.
By investing in defensive stocks, you can be reasonably sure that your investment will be safe.
Defensive stocks provide a distinct advantage when you want to make money from your investments in recessionary times. Some people invest in other stocks while times are good, and then move their money over to defensive stocks when the economy is going through a recession. This makes sense, as defensive stocks will often provide a much better return for you at this time.
The main thing to remember is that you need to be aware of when to move out of positions you hold to gain the best return for your portfolio. Some people like to invest in defensive stocks as part of their overall portfolio. Although they may not offer huge returns, their stability has given investors peace of mind for years. Knowing that defensive stocks are very unlikely to suddenly depreciate in value is enough to persuade some people to make them a key part of their portfolio and investment strategy.
