There’s a fair amount of uncertainty in the stock market today. After a bumper inflation figure came out last week, concerns about high inflation are back. Add into the mix a potential slowdown in the Chinese economy (and the knock-on impact on global trade) and I can understand that uncertainty. So one of the actions I’m considering at the moment is investing in defensive FTSE 100 stocks.
What are defensive FTSE 100 stocks?
‘Defensive stocks’ are a broad category of companies that typically perform well during a slowdown or even a recession. They add a defensive element to a stocks portfolio, and should outperform peers during uncertain periods. On the other hand, when times are good, these stocks are unlikely to perform as well as higher growth stocks that often boom due to confidence in a growing economy.
Various types of firms can fall into this category, but it mainly consists of those that offer goods and services that we all need, regardless of our financial state at the time. For example, even if I get made redundant tomorrow, I’ll still buy food, as well as needing to pay for electricity and running water. So stocks such as supermarkets and utility companies are defensive FTSE 100 stocks.
To a lesser certain extent, I can also find defensive stocks in slightly more unusual places. For example, British American Tobacco should see steady demand during periods of uncertainty, as nicotine is an addictive substance that people will want in most cases.
Allocating my £2,000
The fact that defensive stocks can be found in multiple different sectors helps me when trying to invest the £2,000. Normally, I’d have to make a conscious effort to diversify my stock holdings by looking at different sectors. But in this case, diversifying my stocks shouldn’t be much of an issue.
I’d look to split the money into four areas that contain defensive FTSE 100 stocks. These would be retail, utilities, pharmaceuticals and alcohol/tobacco. This gives me a broad range of exposure across the FTSE 100.
From there, I’d look to pick my favourite two stocks from each area. This will give me eight stocks in total to buy. The reason why I wouldn’t look to buy any more is that this would water down my investment of £250 in each company. Less than £250 doesn’t really get me excited on the potential that each could give me (and adds to my dealing costs too).
Like anything, investing in this area does still have risks. The main one for me is that if we see a booming economy with low Covid-19 rates going forward, then such stocks will likely underperform the index. Another risk is that we see a downturn, but company-specific factors mean that some of the stocks I buy also struggle. In that case, there wouldn’t be much benefit to me in holding them versus a non-defensive stock.
But on balance, if I wanted to allocate £2,000 towards defensive FTSE 100 stocks, I think there are plenty of good places to look.
Jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.