Growth or Defensive?
An investment portfolio should contain a mix of growth and defensive assets. The balance that suits you best requires regular fine-tuning as markets and investment cycles change.
In the finance world, some experts think of an investment portfolio in terms of a core with several satellites. The core –depending on the investor’s age, goals, risk appetite and the conditions within the market – may consist of defensive investments. The satellites may include more growth assets. As the investor ages and the investment period contracts, the satellites are drawn inwards to become defensive and strengthen the core.
Most investors understand a ‘defensive’ asset class to be one that relies on income to deliver a return. Such classes are perceived as being more stable, particularly in a turbulent market. ‘Growth’ asset classes instead tend to rely on capital growth or price movement and are perceived to offer better growth opportunities in a positive market.
A fixed income cash account, for instance, can be defined as defensive while shares are often seen as growth. But as with many things in finance, it’s not quite that simple.
Within specific asset classes, whether they be fixed income, shares, property or anything else, there are growth and defensive choices. A mix within each asset class is just as important as the actual mix of asset classes.
A defensive share in a utility or infrastructure business, for instance, will likely follow a different cycle to a growth share in a technology or mining business.
Shares in an individual company could be classified as defensive or growth depending on the company’s level of debt and its future projects. Higher levels of debt could mean more future growth, as the company borrows to spend on new initiatives and projects. But it might also mean a higher level of risk if the new project doesn’t perform as well as hoped.
As a general rule of thumb, growth investments require a long-term mindset. While you might make short-term gains, there could also be short-term pain in a market downturn, so the longer you invest across growth asset classes, the better your chance of riding the peaks and troughs.
What if I only want ‘safe’ investments?
Particularly as people approach retirement, it’s natural to become more cautious about investing and prefer a more defensive approach. Many retirees were understandably worried about their super after the GFC in 2008, which led some towards a knee-jerk reaction to try to avoid as much risk as possible.
Of course, no investment is completely risk-free. While defensive investments may give you more peace of mind, it’s usually not prudent to put all your eggs into one basket by putting all your investments into, say, a term deposit. You may still miss out on growth that you could otherwise have achieved without radically increasing your risk profile.
Your financial adviser has resources available to help you diversify your portfolio in terms of growth and defensive assets if you ever have any concerns. An annual review is most commonly recommended, along with more frequent reviews for those with complex portfolios and during uncertain economic periods.
Just as a winning sports team must have effective attacking players as well as a solid defensive line, a winning portfolio should contain a mix of growth and defensive investments. In order to best manage your portfolio, ask your financial adviser to explain the mix of growth and defensive investments within each of your asset classes.
It is also good to be mindful when talking to younger generations, as their risk profile and time available to invest are different to people closer to retirement. Instead, recommend that they seek their own professional advice.