The Best Strategies for Defensive Investors

This article is an excerpt from the Shortform book guide to "The Intelligent Investor" by Benjamin Graham. Shortform has the world's best summaries and analyses of books you should be reading.

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What are defensive investors? What strategies do defensive investors use?

Defensive investors are people who want to avoid spending too much time on investing. They want to make money but maybe aren’t as concerned with huge returns.

Read more about the principles and strategies of defensive investors.

Defensive Investors

What’s the defensive invetment style?

Defensive investors want to avoid spending too much time on investing. They like simplicity and don’t love thinking about investments or money. Their goal is to perform on average in line with the market, and to avoid serious mistakes. 

We’ll cover how the defensive investor should invest, both from a philosophical point of view on how to behave and a tactical point of view on what stocks and bonds to buy.

How Should They Invest?

Graham’s recommendation is to split investments between stocks and bonds. The default split is 50-50 between stocks and bonds. This allows you to participate in both the gains of stocks as well as the relative safety of bonds. This is a solid defensive investment style.

At times, you can shift your balance in favor of stocks or bonds. If you feel stocks are overpriced and due for a downturn, you can shift your investment to 25% in stocks and 75% in bonds. Likewise, after a steep market downturn or when stocks are cheap, you might shift to 75% in stocks and 25% in bonds. But Graham advises no more than a 75-25 imbalance.

Why is this? Why not put 100% of your investment into bonds? Three reasons:

  • Stocks on average rise faster than inflation, whereas bonds might not, so holding stocks better protects against inflation. 
  • Stocks tend to have better returns (though this isn’t always true; if interest rates are very high, as they were in parts of the 1970s and early 80s, bonds may provide better returns).
  • If you invest 100% into bonds, but the stock market grows tremendously, you’d feel regret on missing out.

And why not 100% into stocks? 

  • Stocks don’t always outperform bonds at all times. At the time of Graham’s last revision in 1973, bonds were outperforming stocks. Keeping a balance helps you weather a variety of economic conditions. 
  • Stocks fluctuate much more than bonds do, and the wild oscillations of a 100% stock portfolio may test the investor’s equanimity. A terrible mistake you can make as an investor is to sell as the stock market craters, and buy at the peak of its hype. Holding a minimum 25% in bonds gives some psychological cushion against stock market falls.

In short, keeping a standard split is simple, provides adequate returns, and prevents your emotions from sabotaging yourself.

The Myth of Age

There’s a common rule of thumb that your split between stocks and bonds should depend on your age: subtract your age from 100, and that is the percentage that should be held in stocks. This part of the defensive investment style isn’t always definitive.

But Graham never mentions age in his advice, for good reason. Zweig supports this point, arguing age shouldn’t affect your investment decisions—your personal circumstances are what matter

In particular, you can feel more comfortable holding more stocks if:

  • You do not need to sell your stocks at inopportune times to support your living costs.
  • You can withstand severe drops in the stock market.
  • You do not need your investments to provide cash income. Generally, bonds provide more in interest payments than stocks do in dividends.

Consider two different situations that buck the common wisdom:

  • A retired 80-year-old who has a pension to cover all her living expenses, $2 million in assets, and grandchildren. Investing mostly in bonds is a mistake—she doesn’t need to rely on investments for income. Furthermore, her descendants, who will inherit her assets, have decades of investment in their timeline, and stocks will provide better returns on that timeline.
  • A working 30-year-old who has $50,000 and is saving up for his down payment on a house. It’d be silly to put all of that in the stock market—if the stock market fell, he’d have to change his life plans.
The Best Strategies for Defensive Investors

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  • Key advice from what Warren Buffett considers the "best book about investing"
  • The 2 major indicators you should use for evaluating stocks
  • How you can use aggressive or defensive investing strategies

Carrie Cabral

Carrie has been reading and writing for as long as she can remember, and has always been open to reading anything put in front of her. She wrote her first short story at the age of six, about a lost dog who meets animal friends on his journey home. Surprisingly, it was never picked up by any major publishers, but did spark her passion for books. Carrie worked in book publishing for several years before getting an MFA in Creative Writing. She especially loves literary fiction, historical fiction, and social, cultural, and historical nonfiction that gets into the weeds of daily life.

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