Secure Your Future: Building a Resilient Investment Portfolio
#32 A Young Professionals Weekly Investing Insights
Navigating the stock market can make even the calmest investors anxious.
The volatility, economic shifts, and media buzz can feel overwhelming.
But here's your reality check:
With the right mix of defensive, growth, value, and income stocks, you can build a resilient portfolio.
This article breaks down each stock type and reveals how to strategically balance them to safeguard your investments and maximise your financial future.
Thanks for reading - let’s get into it.
Defensive Stocks: Your Financial Fortress in Turbulent Times
Defensive stocks are the bedrock of a resilient portfolio - especially in today's uncertain economic climate.
These companies provide goods and services that people need regardless of economic conditions – think toiletries, electricity, and basic healthcare.
Examples:
Procter & Gamble (PG): From Tide detergent to Gillette razors, PG's products are household staples.
NextEra Energy (NEE): As the world's largest utility company, NEE provides essential electricity services.
Johnson & Johnson (JNJ): With a diverse portfolio of medical devices, pharmaceuticals, and consumer health products, JNJ is a healthcare powerhouse.
In today's high-inflation environment, defensive stocks offer a double advantage:
Stable Demand: Their stable demand allows them to maintain profitability even as costs rise.
Dividends: Many defensive stocks pay dividends - which means they provide a steady income stream that can help offset the impact of inflation on your portfolio.
For instance, during the COVID-19 market crash in March 2020, while the S&P 500 plummeted by 34%, Procter & Gamble only fell by about 15% and recovered much faster than the broader market → proof of the resilience of defensive stocks during economic chaos.
Economic Conditions Impact:
Defensive stocks tend to outperform during recessions and periods of economic uncertainty.
However, they may lag behind during strong bull markets.
→For example, in the tech-driven bull market of 2020-2021, many defensive stocks underperformed high-growth tech companies.
When to Lean In:
I’d consider increasing your allocation to defensive stocks when:
Economic indicators suggest a slowdown (e.g., falling GDP growth, rising unemployment)
Market volatility is increasing
You're nearing retirement and want to reduce portfolio risk
Bonus Tip: Look for defensive companies with strong balance sheets and a history of dividend growth (e.g. if a company is able to consistently give out dividends even during difficult times).
Cyclical Stocks: Riding the Waves of Economic Recovery
Cyclical stocks are like the tide - moving with the economy.
They sell products and services that thrive during good times and dip when the economy slows.
Examples:
Ford (F): The automaker’s success depends on how much consumers are willing to spend and how easily they can get credit.
Marriott International (MAR): Hotels rely heavily on the economy and travel trends – more vacations and business trips mean more revenue.
Caterpillar (CAT): Demand for construction equipment soars during economic booms and falls during downturns.
Current Market Relevance:
Today’s high inflation and rising interest rates create a mixed bag for cyclical stocks.
Energy companies can benefit from inflation - while sectors like retail and automotive can suffer due to higher interest rates.
Example: In 2021-2022, as inflation rose, energy stocks like Exxon Mobil (XOM) surged by over 80% - even as the broader market struggled.
Economic Conditions Impact:
Cyclical stocks shine during economic recoveries and expansions.
They struggle during recessions and late-stage expansions, so timing is crucial.
Example: After the 2008 financial crisis, Home Depot (HD) saw its stock rise over 500% from 2009 to 2019 as the housing market recovered.
When to Lean In:
Increase your cyclical stock allocation when:
Economic indicators hint at a recovery.
Central banks are lowering interest rates.
Consumer confidence is on the rise.
Bonus Tip: Watch the yield curve.
An inverted yield curve (short-term rates higher than long-term rates) often signals an upcoming recession.
Take it as a cue to trim cyclical exposure.
Growth Stocks: Capturing Innovation in a Rapidly Changing World
Growth stocks are the trailblazers of the stock market - they often lead the charge in new and expanding industries.
Companies here usually reinvest their profits to fuel further growth, rather than paying out dividends.
Examples:
NVIDIA (NVDA): The leader in GPUs and AI technology
Shopify (SHOP): Empowering businesses of all sizes to thrive in e-commerce.
Current Market Relevance:
High inflation and rising rates in 2022-2023 challenged growth stocks.
Higher rates hurt the present value of future earnings, which growth stocks depend on.
Example: Shopify’s stock fell over 70% from its 2021 peak to its 2022 low, yet its revenue kept growing - that presented serious opportunities for long-term investors.
Economic Conditions Impact:
Growth stocks excel in low-interest-rate environments and during tech-driven transformations.
They can struggle during high inflation and rising rates.
Example: The COVID-19 pandemic’s push towards digital transformation sent Zoom’s (ZM) stock up over 700% from January to October 2020.
When to Lean In: Boost your growth stock holdings when:
Interest rates are low or dropping.
Technological or societal shifts are creating new markets.
You can handle the ups and downs and have a long-term view.
Bonus Tip: Don’t chase the flashiest stocks.
Look for firms with strong competitive edges, large markets, and clear paths to profitability.
Value Stocks: Unearthing Hidden Gems
Value stocks are the underappreciated treasures of the stock market, often trading below their true worth.
They might be overlooked or in less glamorous industries but offer solid potential.
Examples:
Berkshire Hathaway (BRK.B): Warren Buffett’s value-centric conglomerate.
Verizon (VZ): A telecommunications giant trading at a discount.
Cigna (CI): A health services provider with a low price-to-earnings ratio compared to its peers.
Current Market Relevance:
In today’s high-inflation climate, value stocks are gaining more attention.
Companies in sectors like energy and financials can benefit from rising prices and interest rates.
Example: In 2022, while growth stocks faltered, value-focused energy companies like Occidental Petroleum (OXY) saw their stocks more than double.
Economic Conditions Impact:
Value stocks often do well during economic recoveries and when interest rates are climbing.
They struggle during speculative bubbles favoring growth stocks.
Example: As inflation and rates rose in 2022, the Russell 1000 Value Index outperformed its Growth counterpart by over 20 percentage points.
When to Lean In: Increase value stock holdings when:
Market valuations seem stretched.
Interest rates are on the rise.
The economy is recovering from a recession.
Bonus Tip: Look beyond just low P/E ratios.
Consider factors like free cash flow yield, return on invested capital, and industry position.
Income Stocks: Reliable Cash Flow
Income stocks are the dependable earners of the market, focusing on regular dividend payouts.
They usually operate in mature industries - and prioritise shareholder returns over aggressive growth.
Examples:
Realty Income (O): A REIT known as the "monthly dividend company."
Coca-Cola (KO): A beverage leader with a long history of dividend growth.
Current Market Relevance:
In a high-inflation world, income stocks can provide real returns.
Rising rates make bonds more attractive, but many income stocks still offer yields that beat both inflation and bonds.
Example: As of 2023, Realty Income’s over 5% yield outpaced the 10-year Treasury yield, helping offset inflation’s impact.
Economic Conditions Impact:
Income stocks shine when interest rates are low, as investors seek out dividend yields.
They face challenges when rates rise quickly - as bonds become more competitive.
Example: Utility stocks struggled in 2022 as rising rates made their dividends less attractive compared to bonds.
When to Lean In: Focus on income stocks when:
You need regular cash flow from investments.
Interest rates are low, making dividends appealing.
You’re nearing retirement and shifting from growth to income.
Bonus Tip: Don’t just go for the highest yields.
Look for companies with sustainable payout ratios and a history of maintaining or increasing dividends.
Look at Coca-Cola. They have raised their dividend for 61 consecutive years - showing their resilience even in tough times.
Blue-Chip Stocks: The Reliable Pieces of Your Portfolio
Blue-chip stocks are the market’s heavyweights. They’re known for their reliability and strength.
These large, established companies can usually weather various economic cycles.
Examples:
Microsoft (MSFT): The tech titan in software and cloud computing.
Procter & Gamble (PG): A consumer goods giant with trusted brands.
JPMorgan Chase (JPM): One of the largest and most diversified banks.
Current Market Relevance:
In volatile markets, blue-chip stocks offer stability and growth.
They have the financial strength to manage inflationary pressures and pass on costs to consumers.
Example: Despite economic uncertainty in 2022, Microsoft continued to grow - proof of the stability of well-positioned blue chips.
Economic Conditions Impact:
Blue chips are less volatile than the broader market during downturns but not immune to market cycles.
They may underperform during speculative bull markets.
Example: During COVID-19, tech blue chips thrived, while sectors like aviation and energy faced significant challenges.
When to Lean In: Increase blue-chip stock holdings when:
You want to reduce portfolio volatility.
Economic uncertainty is high.
You seek exposure to industry leaders with strong positions.
Bonus Tip: Diversify even within blue chips.
Mix stocks from different sectors to minimise industry-specific risks.
Adjusting Your Strategy to Economic Conditions
Market conditions fluctuate.
As an investor we need to adjust our investment strategy to optimise returns and manage risk.
Here’s some intel on what you might want to consider in different scenarios:
🔍High Inflation Scenario:
Focus on Pricing Power: Increase allocation to companies that can pass on costs to consumers, such as those in consumer staples and specific tech sectors.
Diversify with Commodities and Real Estate: Consider adding exposure to commodities and real estate via stocks or ETFs to hedge against inflation.
Seek Inflation-Linked Revenues: Invest in companies with revenues tied to inflation, like infrastructure and utility firms.
🔍Rising Interest Rates:
Favor Financial Stocks: Financial stocks often benefit from higher interest rates due to improved profit margins.
Be Cautious with High-Growth Tech: High-growth tech stocks and highly leveraged companies may struggle in a rising rate environment.
Invest in Value Stocks: Value stocks typically outperform when interest rates rise, as their valuations become more attractive.
🔍Economic Slowdown:
Increase Defensive Stocks: Allocate more to defensive stocks that provide essential goods and services, maintaining stability during downturns.
Prioritize Strong Balance Sheets: Look for companies with robust balance sheets and reliable cash flows to withstand economic pressures.
Add Dividend-Paying Stocks: Dividend stocks offer income stability, crucial during slow economic periods.
🔍Economic Recovery:
Boost Cyclical Stock Exposure: Increase investments in cyclical sectors like consumer discretionary and industrials - which benefit from economic growth.
Target Small and Mid-Cap Stocks: These stocks often see significant gains during recovery phases as they capitalise on growth opportunities.
Reduce Defensive Allocations: As the economy improves, shift away from defensive sectors to maximise growth potential.
SUMMARY:
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This newsletter is for informational purposes only and is not intended as financial advice. The insights provided are illustrative and should not be the sole basis for investment decisions. Readers should conduct their own research and consult professional advisors before investing. The authors and publishers are not liable for any financial losses resulting from actions taken based on this content. Investing in the stock market involves risk, including potential loss of capital.
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