To put your strategic investment objectives to work, you have to learn to distinguish between aggressive investments and defensive investments.
Investors often disagree on the key differences between an aggressive investment approach and a defensive one. Every investor probably has his or her own idea. Few would disagree if we put it this way, however: aggressive investors stress gains, even to a point where they risk losing capital; defensive investors put their stress on preserving capital, even if this means they must forego ‘easy’ gains.
When you come down from that theoretical plain, you’re faced with the necessity of sizing up an actual stock as aggressive or defensive. Few investments fall neatly into one camp or the other. Most, though, show a tendency, one way or the other, if you know what to look for.
Telling them apart
Here are nine ways to look at stocks or other securities and decide if they’re aggressive investments or defensive investments:
1. Quality and risk. We base our Marpep Quality Rating on a variety of measures of quality and risk, but these are only loosely related to aggressiveness and defensiveness. Generally, the higher the quality, the lower the risk. But you need to consider economic sectors as well. A Very Conservative-rated company like Thomson Reuters that is transforming its business focus and trades at a high multiple is more aggressive than a lower-multiple utility with steady earnings such as BCE.
2. Volatility. The more volatile a security’s price, the more aggressive it is. Unpleasant surprises with these types of stocks, should they appear, will probably cost you more than in defensive investments.
3. Margin and leverage. Buying stock on margin—with borrowed funds—is more aggressive than buying them outright. For that matter, a company that has a lot of long-term debt is more aggressive than one with fewer fixed obligations.
4. Liquidity. The more liquid a security is—the more easily cashable or actively traded—the more it tends to be defensive. Stocks such as PFB Corp. have an aggressive aspect to them because they lack liquidity.
5. Seniority. The more senior securities of a company—its bonds, say, and its preferred shares—are generally more defensive than its lower ranking securities, such as common shares. Warrants and rights, of course, are even more aggressive than common shares.
6. Maturity. The longer the life that a bond (or other redeemable security) has, the more aggressive it is, for two reasons: inflation, and changes in the company’s credit rating prior to maturity. Maturity also applies, in a sense, to common shares. When a company’s plans centre on a long-term project, its shares are more aggressive, since unexpected difficulties may be encountered along the way.
7. Location. All things being equal, foreign investments outside of North America tend to be more aggressive than domestic ones. That’s because foreign securities may fall prey to all sorts of factors that are never covered by your local media. Finding up-to-date, comprehensive information on foreign companies over the Internet may also pose a challenge.
8. Industry patterns. Generally, financial, utility and consumer companies tend to be defensive; resource and manufacturing companies tend to be more cyclical, and thus more aggressive.
9. Diversification. For the most part, a company that has a great deal riding on a narrowly defined business activity, or a single product line, is suitable only for aggressive investors.
Rather than trying to add these nine factors up, it’s better to weigh them individually and stay alert to changes in them. Note how they fit together in your portfolio and address your underlying orientation, whether it be aggressive, defensive, or a judicious combination of both. Whatever your orientation, you should set limits on how far you’ll vary from it.
This is an edited version of an article that was originally published for subscribers in the November 1, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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