The defensive investor is an investor who is unable or unwilling to put in the time required to be an enterprising investor. Think of the difference between the two as the defensive investor is passive, where the enterprising is more active.
Both defensive and enterprising investment strategy entails regular portfolio rebalancing to maintain an intended asset allocation. It also involves buying high-quality, short-maturity bonds and blue-chip stocks, diversifying across sectors and countries, placing stop-loss orders, and holding cash and cash equivalents in down markets.
Disadvantages of Investing in Paper Assets
• Investors have no control over how the company generates income, spends profits, or manages its debts and liabilities. Unless, of course, it’s the investors’ company that is offering shares to the public.
• Stock prices are volatile and can rise or decline dramatically, especially in such uncertain economic times as the COVID-19 pandemic of 2020 and the Ukrainian crisis of 2022.
• High fees and commissions are charged on the majority of trades, whether investors are buying or selling.
Active & Passive Investment Management Of Funds
When an investor invests in a mutual fund, he must know the relative merits and performances of both the active and passive investment strategies. However, we will explore the active and passive management strategies for funds, stocks, and cryptocurrency.
In all kinds of active fund investment, active investment managers use their time, skills, and knowledge to attempt to choose and alter the investment portfolio toward the goal of outperforming an investment market index. In contrast, passive investment managers believe it is extremely difficult to consistently achieve high income by a passive strategy if markets are efficient. Therefore, passive investment managers often assemble a portfolio that duplicates the overall investment market and maintain that portfolio over time, thus employing a buy-and-hold strategy.
For individual investors, some of them don’t entertain the idea of the passive investment strategies and thus imply conceptual support for active management. Active management supporters focus their argument on four areas: the need for some investors to pursue above-average returns, the standards of information access, the implication of low transaction costs, and the assumption of investor rationality.
Investors who don’t encourage the passive investment strategy say the passive approach denies the ability to consistently earn superior returns while relying on investors pursuing and earning such returns for the approach to work.
Based on the historical data, we can conclude that actively managed portfolios yielded no consistently superior performance over passively managed portfolios after deducting management costs. Some may even go farther to say that the results were even bolder since actively managed funds could not provide superior returns even if management fees were zero. With confidence, we can outline that passive investment strategy is safer, has a lower management cost, and therefore, has a higher income in the longer term than the active investment strategy.
Stock Selection For Defensive Investor
The below stocks, which are sometimes called Defensive stocks, are recommended for the defensive investor. The criteria that the majority of defensive investors specified for identifying Defensive stocks are as follows:
- Not less than 100 million USD of annual sales.
- Current assets should be at least twice current liabilities.
- Long-term debt should not exceed the net current assets.
- Strong earnings for the common stock in each of the past 10 years.
- Uninterrupted dividend payments for at least the past 10 years.
- A minimum increase of at least one-third in per-share earnings in the past 10 years.
- The current price should not be more than 15 times average earnings.
- The current price should not be more than 1.5 times the book value.
Stock Selection For Enterprising Investors
The following points address Stock Selection for the Enterprising Investor
- Adequate size
- A sufficiently strong financial condition
- Continued dividends for at least 10 years
- No earnings deficit in the past ten years
- Ten-year growth of at least one-third in per-share earnings
- Price of stock no more than 1.5 times net asset value (NAV)
- Price no more than 15 times average earnings of the past three years
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