Defensive stocks for the more cautious

If your investment horizon is several years, it is perhaps not so important whether you invest in cyclical stocks, or the more defensive stocks. Yet it may be worth to take a closer look at the defensive stocks as you get closer to the time when you plan to make use of your savings.

But let us clarify that there is no scientific evidence that one type is better than the other type of stocks over many years. The discussion goes on whether you have the ability to jump on and off cyclically trends before anyone else, and it is a decision you must make for yourself.

However, there may be many other reasons to show interest in defensive stocks. The defensive stock is characterized by selling goods and services in both economic upswings and downturns. We must all have our daily bread and meat, whether we have a positive or negative impression of our personal finances. But that does not necessarily mean that food stocks are particularly attractive.

The pharmaceutical industry is one of the sectors that have grown with great speed in recent years. As the pharmaceutical industry is booming, it can actually be recommended to place a relatively higher proportion of your assets in exactly the type of shares. There is a widespread political will to address both existing diseases and emerging diseases. We also see that people are generally living longer, which promotes an increase in demand for new treatments. And as we also see that it is now also popular to treat against various forms of lifestyle diseases, there is almost no limit to how much this sector can grow. The pharmaceutical industry has the additional advantage that it will grow steadily, whether it goes up or down for the rest of the economy - the defensive element. Pharmaceuticals shares are in other words, resilient to both economic and financial crises.

Even more risky is it to invest in IT stocks. But when the IT sector shows an annual growth of more than 10% and simultaneously is a cornerstone of all our future communication, and not least centrally located in the vast majority of all future research and development, it is questionable whether you can afford not to add this very risky form of investment to your portfolio.

It is also characteristic that just IT stocks to a wide extent was regarded as safer investments – also known as a safe haven -during the credit crunch. Here it was another defensive type of share, the financial shares, which to a hard punch causing professional investors to rush out of stocks across the board. Suddenly it was bonds, gold and other commodities they were safe investments. But also IT investments, and therefore we saw particularly in the U.S. that it was technology stocks and commodity shares, which ensured that the U.S. stock market came out of the year without dramatic loses.

Common to defensive stocks is that the fluctuations in the price are less than in the cyclical stocks. They protect your portfolio against large losses in turbulent periods in the stock market, but conversely they do not exhibit similar increases in periods of optimism and recovery. A well-balanced portfolio include both stock types.