A defensive sector is an industry term for a sector where there will always be a demand for their goods. Even during a market downtrend these sectors will continue operating as they always have, because the population needs to have their goods to survive.
Our previous post went into the five major reasons people lose money in the market. It pairs good with this post.
There are three core defensive sectors, and two supplementary sectors that offer more growth.
Let’s jump right into the sectors.
Ahh…energy. There will always be a demand for energy because it literally powers society. The energy/utilities sector is a great sector to invest into to provide a backbone to your portfolio.
The utilities sector is a phenomial sector to invest into. You can either take an investment in generation through by investing in companies that hold wind farms, solar farms, natural gas turbines, or oil wells.
Or you can chose to invest directly in the utility providers such as Duke Energy, NextEra Energy, or Thomas Edison. Any one of these three will be a great investment to provide a backbone to your portfolio. My personal recommendation is $NEE or NextEra Energy because of how much they invest into renewables and low overhead power generation/distribution.
You honestly cant go wrong with any energy company. The reason they are a defensive company is because consumers will always need energy to run their homes, factories, infustructure, and servers. In a way it forms the groundwork for society.
2.) Consumer Staples
Consumer staples is any good that the population needs to consume to survive. This primarily takes the form of food but it can be household products, beverages, personal products, and packaging.
Personally I hold agricultural stocks as a defensive play because they are absolutely vital to the overall population. Therefore they are a defensive company because the population will always be buying food and as such farmers will always have job.
In this category I am split 60/40 with 60% of my consumer staples portfolio going into a combination of agriculture RIET’s/stocks and household goods. The main holding in this combination is LAND.
For household goods I recommend a combination of Proctor Gamble (PG), Clorox (CLX), and Walmart (WMT). This combination will expose you to chemicals and food distribution. It’s a wining group.
Having consumer staples in your portfolio is going to position your investments to have a rock-solid foundation. There will always be a demand for food, cleaning chemicals, and food distribution centers.
3.) Health Care
As long as people have been sick, there have been doctors. How about we invest in these doctors and healthcare companies since we can reasonably predict that with an ever aging population there will always be a demand for healthcare.
For these you should be looking at diversifying into both healthcare insurance providers along with pharmaceutical companies. For healthcare insurance I would invest into CVS now because of their recent accusation of Aetna insurance.
With Pharmaceutical companies you cant go wrong with Johnson and Johnson (JOJ). They hold a massive patent list of approved FDA drugs. Further, they are properly hedged against their risks so its a relatively safe bet.
Investing in healthcare stocks is going to give you exposure to a sector that has both massive growth with the aging population along with built in risk management. Further, a lot of these stocks pay dividends so you can lessen your risk overtime by having the dividends by fractional shares through a broker sponsored DRIP program.
4.) Alcohol and Candy.
These guys deserve a sector all of their own. While you could throw them under consumer staples they differ because their sales actually go up during recessions.
Alcohol and candy are all bad for you but the population consumes massive amounts, even during economic downtrends. In fact during recessions you often see these companies increase in price as people ‘drown their sorrows.’
Investing in this industry might actually cause you to gain a small percentage on your investment during an economic downturn. I hold three stocks in this sector, one for each of the categories.
For alcohol I hold Brown-Forman (BF-B). BF-B owns big brand names such as Jack Danial’s. BF-B has a prevent track record of being resilient to recessions and as such it makes this portion of my portfolio.
For Candy I hold Hershey’s (HSY) and Tootsie Roll (TR) for their proven record of good finances along with stable business platform. They will move more then alcohol stocks but they rebound harder so it makes up for it.
This is becoming a new ‘defensive’ sector. The U.S will always be engaged in conflicts due to its influence. As such there will always be a demand for technology, gear, and personal to support the mission of the Department of Defense.
Some of the largest companies that make good investments here are Northrop Grumman (NOC), Lockheed Martin (LMT), and Boeing (BA). Holding a combination of these stocks will expose you to any ongoing efforts by the U.S Department of Defense.
The defense sector is new to this category so it will take some time to test this thesis but several funds are now allocating a portion of their ‘safe’ money to these assets.
There you have it. A short and simple explanation of the 5 defense sectors in the market. For international investors chances are only 4 of these sectors will apply to your country. By properly hedging into these you can supplement your portfolio to be safe during a recession.
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