Defense is Important

If any of you watched the Super Bowl this past Sunday, you saw what I would call a boring game. However, it was this “boring” strategy that Denver needed to employ in order win. Many (including me) thought that Carolina’s offense would be too much, and the game would be a blowout in favor of the Panthers. Denver’s defense was stifling, and it was able to offset its own offense’s ability to move the football.

The Panthers made it through the playoffs with relative ease, and displayed an offense that seemed unstoppable. And like the Panthers, the upward trend of the markets seemed pretty unstoppable as well—until around the middle of last year. Unfortunately, we have recently been reminded that defense in portfolios still matters. There just isn’t a strategy out there that uses offense all the time that will provide consistent and stable results over the long-term.

As Sarah pointed out with the JP Morgan chart in her “Odds are…” post, a 100% stock portfolio (all offense) has provided the highest level of average annual return each year over a 20-year period (11.1%). However, that strategy lost a significant amount in some years, and most of us can’t afford that level of risk; especially if you are relying on your portfolio to provide you with retirement income each year. A 50/50 mix of stocks and bonds (half offense and half defense) yielded similar results over the same period (8.9%) with fewer losses in the down stock market years.

Finding the right mix of offense and defense is the best approach. History has shown us that focusing too much on offense results in losses in some years that many investors can’t handle. Conversely, focusing too much on defense results in lower returns that might not get us where we need to be.

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