How to win big with defensive investing

This seems like a contradiction in terms. How can you adopt an approach seen as cautious and somewhat cowardly while still taking the front foot and forging forward with gusto?

Well there is a way to model yourself as a buyer who knows when to hold ‘em and when to fold ‘em.

The last five years in Sydney and Melbourne have painted a picture of huge short-term gratification for anyone bold enough to buy in. But this was an anomaly.

Property prices do not move this way forever, and as the recent softening of these huge centres shows – when markets turn back to normalcy, it can be swift and brutal.

The psychologically aggressive investor will have seen huge capital gains in a short timeframe and come to believe real estate is an easy way to quick bucks.

This approach will lead to grief… but I have a counter strategy.

What is defensive investing?

Defensive investing is a long-term approach that instructs the investor to give up some growth in exchange for reduced risk via better cash flow.

It involves a long term, holistic, multicycle view of property that will eventually see you able to leap on opportunities in a flash, safe in the knowledge you have financial resilience.

Defensive investing is about three key aspects – time, cash flow and growth.

The idea is to build a portfolio from the ground up that has adequate buffers in place so as to buy you time in the market – and I’m referring to both capital buffers and cash flow buffers.

With your cash flow, you need enough money to ensure you can support yourself, your family and your investments over a sustained period should you hit a fork in the road that sees you out of work or with unexpected expenses.

With a capital buffer, it’s about having plenty of ready dollars set aside but readily available so you can take advantage of opportunities as they arise. Offset accounts are an excellent example of capital that’s both working for you and available at the drop of a hat.

Becoming a successful defensive investor involves a few guiding principles.

Firstly, you don’t want all your money tied up in a single holding hoping it will eventuate into a capital gains monster.

I’m the first to agree that 10 per cent growth of a $1 million asset is far sexier than 10 per cent growth of a $400,000 asset, but higher priced holdings tend to return less rent per dollar invested.

By instead acquiring multiple affordable properties, you spread your risk across a number of holdings in various locations. If one of your markets takes a hit – no bother. You’ve hedged your options of success elsewhere too.

Secondly, affordable property by its nature has a broader potential buyer base. If you do need to offload a holding at some stage, being at the lower price point will help you get it away.

You may have picked up that a defensive approach relies on diversification. As well as helping mitigate risks, there is a flow on benefit from being open to investing across a wide range of geographic areas and price ranges.

Most people understand that property markets work in cycles. The fortunate circumstance for Australian investors is that, across our nation, different markets are at different stages of their cycle.

As such, strategic purchases can see you buying real estate that’s always on the upside of their cycle regardless of when you’re ready to purchase.

Defensive investing makes sense because nobody lost their properties during the GFC due to a loss of equity; they lost them due to a lack of cash flow management.

Getting your defensive approach correct early is essential. If you set up a solid foundation of property holdings that allow you to survive time in the market, then opportunities to take on riskier ventures with higher returns become easier. I love seeing my clients try their hand at development projects, but only when I know their portfolio has the financial resilience to survive their project’s worst-case outcome.

Take action

It’s all about budgeting from the get go.

If you’re already spending more than you earn, then investing isn’t going to help you. You need to work out your household’s survivable money before you can proceed.

Investing will not save you if you’ve got nothing to contribute, so if you’d like to try defensive investing, I suggest you address your household budget and start a saving habit straight away.

Finally, research all you want, but be ready to buy as soon as the chance presents.

While I classify myself as a defensive investor, when an opportunity shows up I won’t hesitate, I’ll execute. I’ll buy a house in 1.5 seconds if the numbers work.

So, defence doesn’t mean being coy, it’s just someone who has a solid strategy, a structured safety net and the ability to move swiftly.

Defensive investing can yield huge rewards, but it requires a disciplined beginning and constant vigilance.