Getting defensive with your portfolio can cost a lot of money.
I read an article recently talking about how to protect your portfolio in the event of a market downturn. The suggestions centered around holding absolute return or market neutral mutual funds that might be able to do well in down markets.
Most of these funds are total garbage. They often trail the market badly and the expense ratios are absurdly high. And they usually still lose money in a down market, just perhaps not as much.
Lots of people also sit on cash, waiting for the "right" time to invest in the market. After inflation you are losing 2% a year at best.
Other people like to over-concentrate their portfolios in "defensive" sectors of the market. This can be quite dangerous because if you are doing it, lots of other people are doing it also, driving up valuations.
You could also buy various kinds of derivatives, inverse funds, and other products manufactured by Wall Street that earn them great fees and leave you with a mediocre (if you are lucky) return on your investment.
Along with the costs of constructing a defensive portfolio, think about the lost opportunities. Because you are convinced that the market is going down, you are not able to capture the return of a rising market if you are wrong.
When I think about getting defensive and trying to time the market, I always think about the words of my personal hero, Jack Bogle, founder of The Vanguard Group. His message was to own business at the lowest possible cost. Anything else was just market noise.
Following that advice, a better solution is to build a portfolio that owns business at the lowest possible cost, and control your risk in your allocation between stocks and bonds. More stocks, more risk. Less stocks, less risk. It is that simple.
Look at your age in bonds (as a percent of your entire portfolio) as a starting point in your asset allocation. Adjust the percentages based on your personal risk profile. Don't take too much risk and don't take too little risk.
An extremely effective portfolio can be constructed by investing your equity exposure in The Vanguard Total World Stock Market Index ETF (VT). You get total world stock diversification in one ETF. For your fixed income exposure, split your assets between The Vanguard Total Bond Market ETF (BND) and the Vanguard Total International Bond Market ETF (BNDX).
Personally I'd rather play to win than to lose.
Additional disclosure: Baldwin Partners Group, LLC is a state registered investment advisor. Alex Bentley is the CEO, Founder and an investment advisor representative of Baldwin Partners Group, LLC.