To those who played basketball and a fan of NBA, I am very sure you are very familiar about Dream Team (US basketball team in Olympics) which chose among all teams in NBA, could be the very best players in the league. They primary goal is to win the gold medal and become the very best basketball players in the world by dominating other best players from other countries.
Well in the world of financial market, there are also “dream team” in portfolio management. Fund managers in financial and investment companies are defining shares of stocks as defensive and offensive.
What are defensive and offensive stocks?
Defensive Stock or Non-Cyclical Stocks
According to Investopedia, A defensive stock is a stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market.
It means, whatever condition of the economy, these defensive shares of stocks prices are steady and not directly affected from market condition. Examples of defensive stocks are utilities company such electricity, food manufacturing companies, and telecommunication companies.
According also from Investopedia; Defensive stocks are characteristic of companies that produce or distribute consumer staples, which are goods people tend to buy out of necessity regardless of economic conditions. They include food, beverages, hygiene products, tobacco, medicines and certain household items. These companies generate steady cash flow and predictable earnings during strong and weak economies. As such, their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies, while underperforming them in strong economies.
Offensive or Cyclical Stocks
If there’s a defensive there is also an offensive. Exact anti-thesis of defensive stocks, offensive or cyclical stocks are highly collaborated in economic condition. Prices of cyclical stocks are dependent on economic stability.
Here is the a video from Investopedia to define more about cyclical stocks.
Examples of cyclical stocks are automobile companies, specialized restaurants, luxurious clothing, and electronic manufacturers. Investor can earn more in offensive stocks if the market is bullish, while can also lose more while entering economic downtrend.
Portfolio managers usually build their “dream team” portfolio for their clients in combination of defensive and offensive stocks. For a purpose of diversification and maximizing profits, also applies in manage pooled funds (UITF, Mutual Funds, and Variable Life Insurances).
Knowing this is a good-to-know; mostly if you personally manage your funds and you wanted to be diversified in order to protect your own portfolio from varying market trends.