Long-term investment in equities is one of the best ways to create sustainable long-term wealth. But in the process of long-term investment, there will be plenty of challenges too in the form of stock market corrections.
Stock market corrections can happen for numerous reasons like economic slowdown, terrorist attacks, military conflicts, trade wars between countries, depreciation of the rupee, rising oil prices, political or global instability, etc. The list is endless.
The latest example is the ripple effect of the Coronavirus outbreak in China affecting global markets, including India. As an investor, many of these things are beyond our control. That is why stock market investors must be well-prepared for such difficult times. Like the huge market crash of 2008, post the American sub-prime crisis when the realty bubble burst.
On 15th October 2008, the Standard & Poor’s 500, which is based on the market capitalization of 500 large-cap American companies, saw the second-worst ever crash in its history with a loss of 9 percent in its value. However, even in such a situation, there was one stock that outperformed and ended in a positive.
It was Coca-Cola because it had beat estimates with a jump in its revenue and earnings. This happened even as most stocks in worldwide stock markets were getting battered. No wonder legendary investor Warren Buffett’s most significant holdings are in Coca-Cola.
It is impossible to predict when history will repeat itself, and another 2008-like crash might happen. That’s why every investor should also have some excellent defensive stocks in their investment portfolio.
Here are three steps to help you find good defensive stocks.
Include Blue-chip Companies In Your Long-term Investment Portfolio
Blue-chip companies in the stock market are generally considered to be safer investments because of their capability to generate profits even during an economic downturn. They have a very stable growth rate and are less prone to volatility as compared to companies that are still in the development stage.
Include FMCG, Logistics, and Healthcare Companies In Your Long-term Investment Portfolio
FMCG, logistics, and healthcare companies in the stock market are considered safe sectors to invest in, which can help your long-term investment portfolio beat a bear market. Their share prices increase at a slower pace than cyclical stocks, but their downfall is also limited during an economic downturn.
During the global financial crisis of 2008 between January 2008 till April 2009, when the recovery process started, the FMCG sector lost just 3% compared to the Sensex, which lost 55%.
Include Dividend-paying Stocks In Your Long-term Investment Portfolio
Investing in high-quality, dividend-paying stocks is a time-tested way to protect your collection against uncertain times. When markets are directionless during periods of volatility, dividends can provide some relief against significant losses. It is a proven fact that businesses with a long record of paying dividends are often better managed.
To conclude, the next economic downturn may just be around the corner or happen after ten years. Nobody can predict that. Include good defensive stocks in your investment portfolio, and your can ensure your investment portfolio not only weathers any recession but will be the first to recover and outperform.
However, this does not mean that you must invest only in defensive stocks. A well-diversified portfolio also needs high-growth stocks that can compound your wealth at a faster pace when the tide changes and the markets become bullish.
Research and Ranking can help you to identify and invest in stocks of solid, well-run, and growing businesses, which have the potential to grow up to 4-5 times or more in 5 years. Know more.