There are many so-called “defensive stocks” on the stock market which include the likes of electricity companies, water companies, banks, etc. these are normally stocks which offer good steady long-term growth and an above-average dividend yields but will “not necessarily set the world alight”. On the surface these are the type of stocks which it is nigh on impossible to trade because they are only “steady performers” as opposed to momentum stocks. However, there are certainly situations where it is possible to trade defensive stocks.
Switch away from growth stocks
There are many different ups and downs on stock markets as those who invest will testify to. There are also occasions where the likes of technology companies, and other growth sectors, are the focus of investor confidence going forward. These are predominantly times when economies are doing well and everything looks good for the short to medium term. Very often you will see defensive stocks underperform during these “growth focused periods” with investors looking more for short term capital growth as opposed to long-term growth and dividend income.
As we have seen in the US stock market over the last few days, at some point investors will begin to take profits on their technology-based investments if there are signs the market is turning. This is sometimes a signal to at least review the relative valuations for defensive stocks such as electricity companies, water companies, banks, etc. If investors are turning cautious in the short to medium term performance of the economy they may well switch to defensive stocks which can be traded in certain circumstances. You may not get the same volatility in share price that you might see in some technology companies but if defensive stocks are oversold, and then the market appears concerned about purely growth stocks, at some point defensive stocks will come into play.
Keep an open mind
Even though investors like to think they have an open mind on different sectors and different companies we all have our favourites. The most successful investors will invest in stocks which they have researched and understand in great detail while others will focus on a very small group of companies/sectors in which they have a genuine interest. If you’re looking at a long-term future in stock market investment you need to widen your horizons, take yourself out of your comfort zone because the more research you do the more you will understand the markets as a whole.
We’re not suggesting you switch into sectors and companies in which you have no knowledge but if influential investors are switching to a particular area then why not do your own research? Why have they chosen this area? What is the potential in the short, medium and longer term? Is this something you should be looking at?
Remember, you are only trading boxes
To make the most of stock market investments you need to take away the emotion and pretend that you are “trading empty boxes”. This will ensure that you get no specific attachment to companies or sectors and you are able to buy and sell without emotions getting in the way. This may sound very simple but if you try it out the next time you are looking at an investment you will begin to understand what we mean. In simple terms traders are looking for companies which are undervalued and in line for a revaluation in the short to medium term. What these companies do, where they trade and how large they are has no relevance as long as the research numbers stack up and the prospects for the future indicate the shares are in theory undervalued.
While this is all easier said than done, it is worth looking at.