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Maintain a long-term perspective
It probably doesn’t seem like it right now
but, over the long term, the stock market
is a pretty safe place to put your money.
In fact, according to a study issued by JP
Morgan Asset Management, any 10-year
period between 1950 and 2011 (i.e.
1950-1959; 1951-1960; etc.), the worst
10-year annual return performance you
would have experienced is -1% (the best
was +19%). If you stretch that out to a
20-year period, the worst you would
have done would have been +6% (the
best was +18%). Now, let’s be clear: not
everybody has an investment horizon
that long. But for those who do, this is
comforting news.
Don’t overpay for investments
Question: when you go shopping for,
say, a pair of jeans, do you check the
price tag before you buy? Chances are
that you do. Defensive investors take the
same approach with their investments.
Before they buy anything, they check the
price and try to determine whether the
price paid represents a fair exchange for
the value received.
The fact of the matter is, the best com-
pany in the world can make the worst
investment if the price they pay is too
high. By refusing to overpay for an in-
vestment – no matter how great it might
look at frst glance – defensive investors
develop a built-in level of protection
for their portfolio. Some people call this
kind of approach “value investing.”Oth-
ers call it common sense.
Investing, not gambling
The defensive investor doesn’t mistake
the stock market for a casino. He or she
steers clear of high-risk/high-reward
opportunities such as start-ups, turn-
around situations and other speculative
schemes. Instead, the defensive investor
focuses on established, blue-chip equi-
ties with a good dividend record, gov-
ernment bonds, and GICs and other cash
investments with rock-solid principal
guarantees. Such an approach means
better sleep at night and never having to
worry about a big gamble going sour.
Understand what you own
Knowing what you own – and
own it – is an important part of the
defensive mindset. Before you make
an investment decision, make sure to
investigate the fnancial fundamentals.
Take a close look at management. Assess
past performance. Be cautious when you
can’t understand how the investment
makes money. The more knowledge you
have, the more protection you have.
One day up, one day down. Two steps forward, one,
two, sometimes three steps back. These days, that
seems to be the way the stock market – and to some
extent, the overall economy – is going.
While veteran investors know that the stock market
rarely advances in a straight line, the extreme volatil-
ity which we’ve experienced over the past several
years has been tough to take. Now, more than ever,
investors are aware of the need to shield their port-
folios from volatility.
But how? How can you insulate your net worth (and
your peace of mind) frommarket ups and downs?
How can you proft from ongoing stock market
movements without taking on undue risk?
How to play defence
in your portfolio
Protecting your nest egg in times of volatility
Developing a defensive mindset
Let’s get one thing straight: no stock, no asset class, no market is ever
completely immune
to volatility. Which means that sooner or
later, even the most carefully built portfolios will sufer ups and downs.
While you can’t control volatility, you can control how you
about it. And that’s why the frst, most essential step in protecting
your portfolio is to develop a defensive investment mindset. Rather than making big bets on risky investments, the defensive inves-
tor builds his or her portfolio with protection in mind, knowing that sooner or later, such protection will come in handy.
Here are a few elements that form the basis of a “defence frst” investment attitude:
By James Dolan