Defensive Assets

What is a Defensive Asset?  It’s the kind of thing you would invest your money in if you had reached that point in life where keeping what you already had was a lot more important than trying to get more.

The Defensive Asset, as a concept, would be a means to wealth management first, rather than a means to the acquisition of wealth.  Which doesn’t necessarily imply that it couldn’t have a good rate of return.  But its entire character would identify with a life as a tool for those who already had some wealth and were looking for an effective way to put it to use, without taking on some of the extreme risks which are often willingly incurred by those looking to make their fortune (i.e. those who do not yet have anything to lose…).

In terms of characteristics, we would expect a candidate for Defensive Asset standing to have one or more of the following three qualities:

 

  1. An intrinsic value.  That quality which says, “no matter what, this asset will always be worth something.”  It may be worth less at some future point than it was on the day you bought it, but it has a base utility or character that makes it nearly impossible to conceive of a situation that would render it completely worthless (like a barrel of oil, or a bar of gold…).  Unlike shares of XYZ stock or a loan to your brother-in-law Bob, it just doesn’t seem like there should be anything short of Armageddon which could drive the value to zero.
  2. Insulation from market fluctuations.  Assets which trade on exchanges can have their value dramatically impacted by the actions of other market participants.  Not only does this lead to volatility and uncertainty as to what the asset is “really worth,” it sets the stage for possibly having to incur substantial losses upon liquidation for absolutely no reason in the world other than the irrationality of others.  Conversely, assets which do not trade on established exchange-markets are often much less susceptible to these wild price swings.  Getting in and getting out may require a different kind of effort, but such effort may be rewarded in the form of higher confidence about values and behavior during the holding period.
  3. One or more guarantees.  Might be in respect of individual terms, or an overall promise about value.  But no matter what the form, an element which goes beyond the pay-your-dollar/take-your-chances aspects of many other assets.  Such guarantees require an operation of law – it is expressly prohibited for securities issuers and fund companies to make guarantees of this type –  but certain highly-regulated industries (like banks and insurance companies, in the US) and governmental subdivisions can legally make and back up such promises, as a matter of contract.

 

A particular investment doesn’t have to have all three of these to be considered a Defensive Asset.  But we would expect the portfolio of a person in protect-the-money mode to be allocated mostly among assets which had at least one or more of these characteristics.  And if not, that would probably be a good acid test for determining that some reallocation was in order.

 

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