Strategy 2. Invest in Low Beta Defensive Stocks
If you have a bearish view about near to medium term but still want to maintain a positive exposure to the stock market, you can add defensive stocks to your portfolio. Such stocks could be in sectors that are inherently less sensitive to macro shocks. When the economic outlook deteriorates, defensive stocks are likely to outperform cyclical equities based on historical precedent.
What are defensive stocks? They include utilities, consumer staples, and healthcare stocks that tend to exhibit significantly lower historical betas relative to the broader S&P 500. Historical betas (measure of a stock’s volatility in relation to the overall market) for all sectors shift over time, but more cyclical ones tend to be greater than 1. Overweighting defensive sectors while underweighting cyclicals helps to retain the upside potential of a rising market while mitigating downside risk.
We will discuss strategy 3 in next blogpost.