Defensive or aggressive portfolio - which one suits you best?

Balancing your risk personality and financial goals is key when choosing financial products.

Investors need to be much more alert to possible swings in what will actually play out during this year 2017.

2017 is shaping up to be a year of heightened uncertainties in major economies, and the World Bank projects a marginal uptick in global growth to 2.7% from last year1. Further, this growth forecast has yet to account for any potential fallout from global policy shifts in major economies.

This essentially means investors need to be much more alert to possible swings in what will actually play out during the year. Regardless of a positive or negative outlook, as an investor, you need to ask yourself whether you should be building a defensive or aggressive portfolio of investments. To go about this, you first need to know which investing style works best for you. 

Defensive Or Aggressive?

This is a simple question that forces you to think about your investing needs and temperament. While there is no wrong answer, choosing the wrong investing style can cost you dearly.

Even though most investors know that they will, at some point, encounter volatility in the markets and that they should not react emotionally when that happens, many still impulsively buy and sell to the whims of market price fluctuations. This is one reason why many investors may fail and lose faith, and money, in investing.

To go about finding out if you are better suited to building a defensive or aggressive portfolio, you can ask yourself these simple questions:

1.  Do you have time to monitor your investments regularly?

2.  Are you willing to completely lose a $10 investment for a chance to make $50? Or would you instinctively choose an investment that will give you $2 in a few months for the same $10 investment today?

3.  Do you require your investments to be cashed out relatively quickly or are you able to hold on to it for the long-term?

These questions are fairly straightforward, and from your responses, you can determine if you are more suited towards building a defensive or aggressive portfolio. The table below summarizes the characteristics of investors for each type of portfolio.

Building your portfolio

Defensive Aggressive
Limited time to monitor investments Have time to monitor the markets
Limited knowledge of investments Have knowledge of investments and markets, and/or keen to learn more.
Older or may require to cash out in the short-term Younger
Risk-averse Risk-taker
Expects to receive average returns Expects to beat the market
Only able to make periodic investments Have larger capital base to put into investments

Next, whether you build a defensive or aggressive portfolio, you need to have a plan and a method. Before you even start investing, you need to have sufficient savings to tide through at least six months of your expenses.

Once this sum has been set aside, you should pay off any loans that are incurring hefty interest rate charges. You should also adopt a prudent savings habit. Only after this, would it makes sense to pursue your investment journey. 

A Defensive Portfolio

There are several types of investments you can put your money in to start your journey building a defensive portfolio. These usually involve investing in highly accredited blue chip stocks and bonds. They could include:

A. Stocks with a long-term track record of delivering strong financial returns.

By doing a little research, you will be able to find certain stocks on country indexes such as Singapore's Straits Times Index (STI) or USA's Standard & Poors 500 (S&P 500). You may also find some other good stocks that are not part of these indexes with more research.

B. Highly rated and shorter termed bonds.

Government bonds and highly rated corporate bonds fall within this category.

Governments such as Singapore issue the highest rated bonds. These, however, will likely offer lower returns of up to 2.27% for the Singapore Savings Bonds (SSBs). Corporate bonds on the other hand, may deliver better returns, however, more research into the financial health of the company issuing the bond is required for investors to understand the risk they face

C. Mutual Funds, Unit Trusts and Exchange Traded Funds (ETFs).

Mutual funds, unit trusts and ETFs pool investors’ monies to purchase a portfolio of stocks or bonds. At the point of purchase, you should be aware of the investment objective of the product you are investing in. This is because there exist several variations of each of these products that are more suited to aggressive portfolios.

For defensive portfolios, mutual funds, unit trusts and ETFs should have a mandate to invest in stable and highly accredited stocks and bonds or indexes. 

An Aggressive Portfolio

If you want to build an aggressive portfolio, that means that you are trying to beat the market returns. This usually involves dedicating more time to researching potential investments.

A. Value Investing.

This term, also known as fundamental analysis, is when investors trawl the market in an effort to find stocks they think are under-priced or has flown under the radar. These stocks tend to be smaller sized stocks that are often, but not always, overlooked by market players who tend to focus on larger companies.

You can add these stocks in your portfolio and wait for other investors to realize the true value of such stocks or until you decide that its fundamentals have altered.

B. Mutual Funds, Unit Trusts and Exchange Traded Funds (ETFs).

Mutual funds, unit trusts and ETFs can also be used to beat the market. In many mutual funds and unit trusts, its investment mandate is to actively manage its portfolio. For ETFs, the magnitude of aggressiveness really depends on its underlying asset. ETFs that track small cap indexes or other riskier indexes would be considered more aggressive investments. 

Staying the course

Once you know the type of portfolio you're building for yourself, it's important you stick to the plan. It's ok for your plan to be a mix of the two, but the plan itself should not change impulsively or when your emotions take over.

If you are building a largely defensive portfolio for yourself, you should not be impulsively investing into a sexy new stock offering its Initial Public Offering (IPO) or risky corporate bonds offering a lucrative return. Of course, this can happen if you have catered a certain percentage of your portfolio to riskier investments and have done sufficient research on any new investments.

Similarly, if you're assembling an aggressive portfolio, you should not suddenly think of buying the STI ETF or the Singapore Savings Bonds (SSBs) overnight. Of course, this too can change if you’re reviewing your portfolio at the end of the year and want to rebalance your portfolio of investments. 

Reviewing your investments

Successful investing is not just about putting your money into investments. Whether you are building a portfolio of defensive, aggressive or a mix of both types of investments, it is important to conduct an end-of-year review.

This will provide some insights on whether your strategy is working and it gives you a chance to rebalance your portfolio once a certain type of investment takes up a bigger weightage than what you are comfortable with.

If you are holding a defensive portfolio, you can use benchmarks, or a combination of benchmarks, such as the STI ETF, CPF Ordinary Account returns or SSB returns to check if your strategy has paid off.

In the case of an aggressive portfolio, you can compare it against broader indexes such as the MSCI All Country World Index (ACWI) which is made up of companies from 23 developed markets and 23 emerging markets, or even the local FTSE ST Small Cap Index. 




1. Source:  World Bank

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