The term defensive investment strategy refers to the building of a portfolio that attempts to minimize the risk of losing principal. Typically, a larger portion of a defensive portfolio's funds are allocated to fixed income securities than equities.
A defensive strategy is a portfolio allocation that is willing to give up higher returns in exchange for reduced risk. This type of portfolio is well suited to individuals with low risk tolerance scores. Typically, a larger percentage of the asset's funds will be allocated to fixed income securities, such as bonds, and a smaller percentage allocated to equities, such as common stocks. The primary objective of a defensive investment strategy is the preservation of capital.
As is the case with other strategies, a defensive portfolio requires rebalancing to maintain the desired asset allocation. The portfolio will not only contain investment quality bonds of long and short term duration, but also a number of large cap stocks. The entire portfolio will also be spread across a number of industries to reduce risk through diversification.