When it comes to taking risk, every investor is different. Some prefer to focus on riskier investments, like cryptocurrencies, while others prefer to play it safer, with more stable asset types that they’ve chosen for longer term growth.
It’s the difference between growth assets and defensive assets. But what are defensive assets, and should they be part of your portfolio?
Growth vs. defensive assets
Every asset type comes with its own risks, as well as its own predicted levels of return. The difference between these is how you define an asset as either a growth asset or a defensive asset.
Generally speaking, a growth asset is one that is looking for capital growth. It can have the potential for higher returns over a longer term – but with that comes a higher level of volatility and risk.
A defensive asset, on the other hand, is one that’s chosen because of its potential to provide a stable, steady income stream over the longer term. Defensive assets involve lower levels of risk than growth assets, but by their nature, they also have the potential for lower returns.
Which asset types are defensive?
There are various asset types that are classed as defensive. These include:
- Gold and other precious metals
- Cash and cash investments
- Real Estate Investment Trusts
- Stocks that are defined as defensive
Should I invest in defensive assets?
While other asset types, like certain shares and cryptocurrencies, have outperformed more defensive assets over recent years, investors should remember that this growth has not come without risk. Returns may have risen, but this was not guaranteed
Defensive assets can protect your portfolio should circumstances change unexpectedly – as they did, for example, with COVID-19. Many experts, in fact, recommend including some defensive assets within your portfolio to improve the quality of your returns, and protect against the risk of permanent losses.
As with any form of investment, though, your portfolio make-up is down to you, the types of asset that interest you, whether you’re looking for longer term or short-term growth, and the level of risk you are happy to take.
“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”