Offense grabs everyone’s attention but defense wins games. Everyone loves to see fast-break slam dunks and Hail-Mary touchdown passes but it’s the steal that sets up the dunk or the third-down tackle behind the line that saves the game.
So it is with investing. While everyone is concentrating on the U.S. stock market’s rise over the last 9 years, little attention is being given to protecting those gains from the inevitable stock market decline that occurs as part of normal market cycles.
Part of portfolio construction is to spread funds over several different assets so that market declines in one asset are offset by gains (or sometimes lesser declines) in other assets. Often this means missing out on gains because not all of your funds are in the assets that are rising. Consistent rebalancing to reduce exposure to assets that have run their course and increasing exposure to assets that are temporarily out of favor has proven to reduce downside risk and increase returns. In essence, you give up making a killing for the safety of not getting killed.
Often, the assets that are playing defense can be going down in value as other assets charge forward. This is the cost of safety. At other times, defense can score and become the asset that is performing the best.
Both offense and defense are valuable components to winning the game. Both have their good and bad plays. The key to winning the game is to be patient and allow each to work when they are needed and to allow them to work together to win the game.Patience, time and consistency are the keys to successful investing. Keep in mind the long-term game and victory will be yours.