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Defence Is The Best Form Of Offence?
Perspective | 24 April 2014

It is difficult to put a finger when it comes to dealing with emotions when you see the market going against you.

But it is not difficult, to at least build your strategy to mitigate such risk.

Yes. This is a classic defensive offence strategy.

Allocation Of Capital To Defensive Stocks
This point is, in our opinion, not stressed and listened enough. Let’s use the 30 component stocks on the Straits Times Index for this discussion.

In crisis years (e.g. 2008), we saw massive haircuts in the prices of such stocks, where DBS, UOB and OCBC were all trading at ridiculously low levels (more than 60 percent shelved off) compared to the price it is trading at now.

This means, that in the event of a crisis, even if you were to buy an STI ETF which, should technically help diversify your risk (because it’s spread over 30 stocks right?), will not be helpful, and will fall drastically as well, because most of it is weighed down by the two heavy sectors.

Industries That Are Resilient Despite Recession
Despite the pressure on a market downturn and what have you, some industries will still be relatively resilient.

Specifically, Healthcare and Transportation sectors.

The rationale for these sectors is simple. People fall sick regardless of market conditions, and you’ll still need to carry on your life by taking the public transport.

Instead of having all your eggs getting beaten down by market forces, you should allocate your eggs to a basket that is sturdier in receiving blows.

Bottom Line
It is impossible to see a situation where a particular sector remains completely unscathed from a market meltdown.

The essence is to limit your exposure to damage and not be tempted to sell off stocks which have sustainable economic moats and good financial strength.

Of course, we do understand the emotions going through such decision making process, and knowing what to do during such a meltdown is ever so important.

A friend of ours, Dr Chan Yan Chong, once said that sometimes, not doing anything, can be the best strategy during such a meltdown.

His arsenal of strategies on navigating market downturns and volatility has always been spot on, and he will be sharing his pearls of wisdom and strategies, on how to navigate the second half of 2014 on May 24.

I’ll be sure to bring my trusty notepad to take down notes and a huge cup of coffee on the day itself. You should come too and equip yourself with such skills.

More information on the event can be found here, and we look forward to seeing you!

Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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