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Advanced Investing

Why You Need Defensive Investments In Your Portfolio

February 18, 2019


As the leader of your financial destiny, it’s just as important to invest money as it is to save it. Otherwise, inflation will eat away at the value of your hard-earned money. By investing a portion of your salary each and every month, you are building future wealth.

However, it is natural for investing to be a scary thought. After all, not only can you make money in a particular investment, you can also lose money. But one should never let fear hold them back from the amazing wealth-building opportunities investing brings.

This is where portfolio theory is especially important. While you may lose money on one particular investment, you will maximize returns on your overall portfolio.

Portfolio Theory

Some rules of portfolio theory are relatively simple. You should put your money into a number of different investments. While the suggested number of investments varies, ten is a good number to start with.

Invest in diverse types of investments across different industries, geographical regions, and sectors. Ordinary people who are not financial experts can easily follow this rule!

 

Defensive Investments

There is one principle of portfolio theory that is often overlooked. This is to make sure a portion of your portfolio is dedicated to defensive investments. This is an important strategy that the 1% use in order to up their wealth game.

What is a defensive investment? A defensive investment is one that is meant to protect your portfolio. A defensive investment protects from downturns in the market and other sources of potential loss.

A textbook example of a defensive investment is someone who invests heavily in ski lodges. During a particularly warm winter, ski lodges may not do very well. In order to protect the overall investment portfolio from loss, this person also invests in orange groves in Florida. This investment is a lot more likely to do well in a warm winter.

Types of Defensive Investments

For an investor with a variety of stocks, bonds, and mutual funds mostly across the US, a more generalized defensive investment is needed to protect against market downturns. Some strong overall defensive investments include:

  • Utilities. Households and businesses both continue to consume water and electricity even when other spending is reduced.
  • Consumer staples. People have to eat, do laundry, and use consumer staples even when the market is not doing well.
  • Multifamily REITs. People always need a place to live, and during a downturn, the need for apartments may even increase.

Multifamily Real Estate is a Defensive Investment

Residential real estate is considered cyclical– meaning it goes up and down with the market. Therefore residential real estate is not a defensive investment. The demand for larger accommodations, new homes, and luxury places definitely decreases in a market downturn.

This is where multifamily comes in. There are unique features of multifamily investments and REITs that put them in the defensive category. After all, housing is a basic human need.

A bad market can increase the demand for multifamily housing. This is because this type of housing is attractive for those downsizing and/or looking to lower their monthly bills. Furthermore, the decrease in new construction in an economic downturn will increase the demand for already-built multifamily buildings.

Multifamily Benefits

Vacancies that occur in multifamily REITs are less problematic because they are offset by the numerous other units that are still occupied. Whereas with residential real estate, if your one and only unit suddenly becomes vacant, your source of income is gone as well.

Multifamily REITs benefit from overall demographic trends as well. Millennials, as well as seniors, prefer renting over homeownership.

Statistics also demonstrate the robustness of this investment type. Multifamily REITs saw average returns of 12.23% from 2008 to 2018. In comparison, overall REITs seeing returns of 8.4% over the same time period.

Arming your portfolio with defensive investments like multifamily REITs will elevate your financial standing and help you create wealth. In the event of an economic downturn, the smartest plan is to be proactive with your investments. This way, you can ensure your portfolio is prepared to weather any storm.

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