Defensive Investing: Balancing Risk and Growth in Volatile Markets
For many investors, the instinct in this kind of market is to retreat. Move to cash, reduce exposure and wait for clarity. It is an understandable response. It is also, more often than not, the wrong one.
The investors who navigate volatility most effectively are not those who avoid risk entirely. They are those who manage it deliberately. They understand which risks are worth taking, which are not, and how to structure portfolios that can absorb short-term turbulence without compromising long-term returns. This is the essence of defensive investing. Not stepping away from markets, but staying invested with intention. Not eliminating risk, but controlling it.
Financial markets have entered a more complex and less forgiving phase. The assumptions that defined the past decade of low rates and abundant liquidity no longer hold. Returns are more dispersed, valuation support is weaker, and fundamentals matter again.
In this environment, defensive investing is not a reaction. It is a strategy.
What Is Defensive Investing
Defensive investing is often misunderstood as a strategy focused solely on avoiding risk. In practice, it is better defined as an approach centred on resilience. The objective is not to eliminate exposure to market fluctuations, but to construct portfolios that can withstand a range of economic conditions while delivering consistent, risk-adjusted returns.
Key characteristics of defensive investments include low volatility, predictable cash flows, strong balance sheets, and a track record of resilience through economic cycles. Defensive investors tend to favour sectors and companies less sensitive to economic fluctuations, such as healthcare, consumer staples, utilities, and infrastructure. These businesses generally maintain stable revenues and earnings regardless of broader market conditions, making them more reliable sources of returns during downturns.
It is also important to distinguish defensive investing from conservative investing. A conservative approach typically prioritises capital preservation above all else and may significantly reduce exposure to equities. A defensive strategy, by contrast, remains actively invested but tilts toward assets that can perform across cycles while generating income and moderate growth. It is best understood as a form of “shielded offence”, where investors remain exposed to growth opportunities within a structure designed to absorb shocks and reduce downside risk.
Why Defence Is Back in Focus
The renewed attention on defensive strategies reflects a shift in the macroeconomic backdrop rather than a wholesale change in investment preference. The Reserve Bank of Australia’s decision to lift the cash rate to 3.85% in February 2026 highlights a return to restrictive policy, as inflation has proven more persistent than expected. While inflation has moderated from its peak, it remains above target, suggesting interest rates are likely to stay elevated. At the same time, geopolitical uncertainty and uneven global growth continue to add complexity to the outlook, with China’s property sector and broader demand trends acting as ongoing headwinds.
Higher rates have increased the cost of capital and reduced the margin for error across asset classes, while tighter financial conditions are contributing to greater earnings dispersion. In this environment, predictability is being repriced, but this does not imply a uniform shift toward defensive positioning. Instead, it reinforces the role of balance, where more resilient exposures can complement growth-oriented positions and support portfolio stability without compromising long-term return potential.
Is Defensive Investing Right for You?
Before examining the mechanics, it is worth pausing on whether a defensive approach aligns with your current situation. Consider the following:
- Do market swings cause you to make reactive decisions you later regret?
- Are you within ten years of a major financial goal such as retirement, funding a business, or drawing on your portfolio for income?
- Would you prefer reliable, compounding returns over the prospect of explosive short-term gains?
- Is protecting what you have built as important as growing it further?
If these resonate, a defensive framework may be appropriate.
A defensive approach can reduce portfolio volatility and provide more predictable income through exposure to high-quality equities, fixed income and essential service sectors. These characteristics support more stable returns across cycles.
However, this comes with trade-offs. Defensively positioned portfolios typically lag during strong market rallies, where higher-risk assets outperform. Returns are steadier, but less pronounced.
It is also important to recognise that defensive investing does not eliminate risk. The objective is to reduce the severity of drawdowns, not avoid them entirely. Understanding these trade-offs is key to maintaining conviction, particularly when markets favour more aggressive positioning.
The Building Blocks of a Defensive Portfolio
Defensive positioning is not a single decision. It is a framework built from several complementary components, each serving a distinct purpose.
Quality First:
High-quality businesses form the foundation of a defensive portfolio. This includes companies with strong balance sheets, low leverage and consistent free cash flow generation. Financial strength provides flexibility during periods of economic stress and reduces the risk of earnings disruption.
Earnings Resilience:
Defensive portfolios favour businesses with stable and predictable earnings. Companies operating in sectors with non-discretionary demand, such as healthcare, utilities and consumer staples, are better positioned to maintain revenues during economic slowdowns. Pricing power is critical, allowing firms to pass through cost pressures without materially impacting margins.
Diversification Across Asset Classes:
Diversification remains a core risk management tool. Allocating across equities, fixed income and cash can reduce volatility and improve overall portfolio stability. Different asset classes respond differently to economic conditions, helping to smooth returns across cycles.
Income Generation:
Income plays a more prominent role in a higher-rate environment. Dividends, bond yields and interest income can provide a stable return component, reducing reliance on capital appreciation. Income-generating assets also tend to exhibit lower volatility.
Liquidity and Flexibility:
Maintaining liquidity allows investors to respond to changing market conditions and take advantage of opportunities as they arise. Flexibility is particularly valuable during periods of volatility, where shifts in sentiment can create both risks and opportunities.
Balancing Defence with Growth
The central tension in defensive investing is that protection comes at a cost. A portfolio positioned purely for capital stability will underperform in rising markets and may struggle to deliver the long-term returns required to build wealth. The objective is not maximum defence, but the right balance between resilience and growth.
Maintaining growth exposure within a defensive framework depends on the quality of that exposure. There is a clear distinction between quality growth and speculative growth. Companies with strong earnings trajectories, low leverage and durable competitive advantages can continue to compound returns even in a higher-rate environment. By contrast, businesses reliant on distant earnings assumptions and cheap capital are more vulnerable and less suited to a defensive portfolio.
Achieving this balance often comes down to disciplined portfolio construction rather than wholesale shifts in positioning. Incremental tilting toward defensive sectors, while selectively maintaining exposure to high-quality growth, allows portfolios to adapt to changing conditions without unnecessary turnover. This approach supports long-term value creation while managing downside risk in more volatile market environments. Reviewing these allocations at least annually, or whenever the macro backdrop shifts materially, ensures the portfolio continues to reflect both market conditions and evolving personal goals.
Common Mistakes in Defensive Positioning
Despite its benefits, defensive investing is not without risks. The most common mistakes are often behavioural rather than analytical, particularly in periods of heightened market volatility.
One of the most damaging is panic selling. Exiting quality assets during periods of market stress locks in losses and removes the opportunity to participate in the recovery. Market rebounds are often sharp and concentrated, meaning that missing even a short window can materially impair long-term returns. Defensive positioning should reduce the need for reactive decisions, not reinforce them.
Over-concentration in perceived safe assets is another risk. Excessive allocation to cash, while offering stability, can erode real returns in an environment where inflation remains above target. Similarly, chasing traditionally defensive sectors after strong inflows can lead to overpaying for safety. Elevated valuations in areas such as healthcare or utilities may reduce future return potential, even if underlying earnings remain stable.
Investors should also avoid conflating short-term volatility with permanent capital loss. Price movements do not always reflect changes in underlying value, particularly during broad market sell-offs. A disciplined approach, grounded in fundamentals rather than sentiment, remains essential.
Ultimately, effective defensive positioning is not about avoiding market movements, but about responding to them with consistency and discipline.
Conclusion: Resilience Through the Cycle
Volatility is not the enemy. Being unprepared for it is. Defensive investing, when applied thoughtfully, is not about stepping away from growth, but about ensuring portfolios are structured to withstand periods of stress while continuing to participate in long-term opportunities.
The current environment of persistent inflation, elevated interest rates and uneven growth reinforces the need for balance. Markets are less forgiving, and outcomes are increasingly driven by fundamentals rather than momentum. In this setting, quality, diversification and liquidity are important considerations, even within growth-oriented portfolios.
Defensive positioning does not require a wholesale shift away from higher-growth exposures. It can be incorporated selectively, helping to manage downside risk without materially diluting long-term return potential. The focus is on improving portfolio durability rather than repositioning entirely.
Investors do not need to perfectly time market cycles to achieve strong outcomes. More often, results are driven by disciplined positioning, a clear understanding of trade-offs, and the ability to remain invested through periods of uncertainty. The aim is to ensure portfolios are positioned to navigate volatility without compromising long-term performance.
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Disclaimer: This article does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
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Borrowing capital to invest remains the most effective tool available to sophisticated investors seeking to accelerate portfolio growth, yet it is often misunderstood as a "high-stakes gamble." Leverage amplifies your purchasing power, transforming a standard portfolio into a dynamic engine for wealth creation. While the concept of "risk-free" leverage is a mathematical impossibility, the ability to manage risk with institutional-grade precision is entirely achievable. Smart investors do not fear debt because they understand how to structure it as a calculated business strategy rather than a speculative bet. They respect the mechanics of gearing and employ professional oversight to mitigate the downside while capturing the upside of global markets. In 2026, the question isn't just about whether you should use leverage, but how you manage the journey from research to results. By moving away from "set-and-forget" retail habits and adopting an evidence-based framework, you can replace the anxiety of the unknown with the confidence of a professional strategy. How does margin lending work? Margin lending is a strategic tool that allows you to borrow capital to invest in approved shares, using your existing portfolio or cash as security. This creates a Loan-to-Value Ratio (LVR), which dictates your borrowing capacity against specific assets. While the lender holds security over the portfolio, the investor retains beneficial ownership and receives all dividends and franking credits. The mathematics of leverage are compelling when executed with professional-grade research and risk management. Consider a share-specific example: Initial Equity : You start with $100,000 in cash or existing blue-chip shares. The Leverage : You borrow an additional $100,000 to increase your total market exposure to $200,000. 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This mechanism protects the lender but can devastate an unmanaged, "set-and-forget" portfolio. This fear typically stems from a lack of active, professional portfolio management. When you rely on a passive strategy while holding debt, you surrender control to market forces exactly when you need discipline and data-led execution the most. The Sharewise approach to mitigating risk: Proactive market monitoring : Our Chief Investment Officer looks at 5,000 stocks across all markets every day, ensuring we identify shifts before they become critical threats to your LVR. Data-driven discipline : We utilise technical and fundamental analysis to remove emotional "hope" from the equation, implementing strict protocols to protect your capital. Constant communication : Every investor has a dedicated advisor providing one-on-one communication, ensuring you are never left guessing during market corrections. Absolute transparency : Through our managed account structure, you can log in 24/7 to see exactly how your portfolio and leverage are performing, maintaining control with confidence. What is margin lending vs margin loan? Choosing the right debt structure for growth means moving beyond a basic comparison of loan types to understanding exactly how your facility is managed. While these terms are often used interchangeably in financial headlines, there is a strategic difference that every professional investor should recognise. Margin lending refers to the broader program or strategy of borrowing against securities to amplify your investment capacity. In contrast, a margin loan is the specific debt instrument or credit facility you use to execute that strategy. Understanding this distinction is vital for managing your LVR and maintaining absolute control over your financial future. 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While many investors consider standard debt products, margin lending is specifically engineered for the equity market, offering a level of institutional-grade precision that generic borrowing cannot match. Choosing margin lending over other vessels of borrowing is a strategic decision for the serious investor. While personal loans or bank overdrafts can technically be used to buy shares, they are "blunt instruments" not designed for market dynamics. Risk Mitigation: Personal loans and overdrafts have no built-in LVR monitoring. Margin lending, when paired with professional portfolio management, includes daily oversight to ensure market dips don't become financial disasters. Tax Efficiency: In Australia, interest on a margin loan used to acquire income-producing shares is generally tax-deductible. While other loans can be deductible if used solely for investing, the administrative burden of "tracing" those funds is complex compared to a purpose-built margin lending facility. Cost of Capital: Because margin lending is secured against a liquid share portfolio, lenders often provide the best margin lending rates, whereas personal loans are unsecured and carry significantly higher interest costs that can eat into your investment performance. Cash Flow & Liquidity: An overdraft often requires rigid repayment schedules. Margin lending offers the flexibility to pay interest from dividends or capitalise it into the loan, allowing your share portfolio to compound more efficiently. Securing the best margin lending rates is only the first step; the real value lies in the active management of those funds. By moving away from "passive debt" and embracing a managed account structure, you transform a simple loan into a sophisticated utility for market outperformance. The path to risk-aware leverage While no investment is devoid of risk, the fundamental difference between reckless gambling and strategic gearing lies in the professional management framework. Securing the best margin lending rates is only the first step; the real value lies in the active management of those funds to ensure your share portfolio consistently outperforms the cost of debt. Professional advisors and investment managers utilise managed accounts to monitor LVR levels daily. This vigilance ensures that minor market dips are addressed before they become critical margin calls, providing professional portfolio management without losing control. The historical data supports a strategic approach; while Australian shares have delivered strong long-term averages, the real "profit margin" for the investor is the spread between the cost of debt and the potential return. Because interest on investment loans is generally tax-deductible for Australian residents, the real cost of holding a leveraged position is significantly lower than the headline rate. 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About CAR Group Limited. CAR Group Limited engages in the online vehicle marketplace business in Australia, New Zealand, Brazil, South Korea, Malaysia, Indonesia, Thailand, Chile, China, and North America. The company operates through six segments: Australia " Online Advertising Services; Australia " Data, Research and Services; Investments; North America; Latin America; and Asia segments. It offers classified advertising that allows private and dealer customers to advertise automotive and non-automotive goods and services for sale across the carsales network; products, including subscriptions, lead fees, listing fees, and priority placement services; and display advertising services, such as placing advertisements for corporate customers comprising automotive manufacturers and finance companies. The company also provides software as a service, research and reporting, valuation, appraisals, and website development and hosting services, as well as photography services. In addition, it offers vehicle inspection services; operates digital automotive and non-automotive marketplaces; and offers automotive data and advertising services. The company was formerly known as carsales.com Ltd and changed its name to CAR Group Limited in November 2023. CAR Group Limited was incorporated in 1996 and is headquartered in Melbourne, Australia. Source: EODHD Key Stats
About Northern Star Resources Ltd. Northern Star Resources Limited engages in the exploration, development, mining, and processing of gold deposits. The company also sells refined gold. It operates in Western Australia, the Northern Territory, and Alaska. Northern Star Resources Limited was incorporated in 2000 and is headquartered in Subiaco, Australia. Source:EODHD Key Stats
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