In investing, much like basketball, success often depends on balance and teamwork. A great team isn’t composed solely of high scorers—it also needs defensive players who can protect the lead and create opportunities for victory. NBA legend Dennis Rodman, known for his unparalleled defensive and rebounding skills, serves as an apt metaphor for defensive assets in a well-constructed investment portfolio.
Here, we explore how Rodman’s qualities as a player can teach us to build resilient portfolios, especially in light of the limitations of the traditional 60/40 investment strategy.
The Death of the 60/40 Portfolio
For decades, the 60/40 portfolio—60% stocks and 40% bonds—was a cornerstone of Modern Portfolio Theory (MPT), offering diversification and risk mitigation. The idea was simple: stocks and bonds generally moved in opposite directions, providing balance during market turbulence.
However, 2022 challenged this strategy. For the first time in decades, both stocks and bonds posted significant simultaneous losses, driven by high inflation and aggressive interest rate hikes. This breakdown in negative correlation shattered the reliability of the 60/40 approach.
As we enter a new economic regime characterized by persistent inflation and rising rates, it’s clear investors must adapt. To navigate these challenges, defensive assets—those that thrive or stabilize during downturns—are essential.
Dennis Rodman: The Defensive Powerhouse
Dennis Rodman was not a prolific scorer. In fact, he’s the lowest-scoring player inducted into the Basketball Hall of Fame. Yet, his defensive prowess and rebounding dominance made him a transformative force on the court.
From 1991 to 1998, Rodman led the NBA in rebounding for seven consecutive years, outperforming peers by over six standard deviations—a statistical anomaly. His ability to recover missed shots (both offensive and defensive rebounds) gave his teams additional scoring opportunities and improved their overall efficiency.
Rodman’s impact extended far beyond the stat sheet. Teams with Rodman in the lineup consistently posted higher win percentages, even though his scoring contribution was minimal.
The Rodman Effect in Portfolios
The “Rodman Effect” teaches us that defensive assets, like volatility or hedging instruments, can improve a portfolio’s efficiency during bear markets. These assets don’t perform well during bull markets, but they protect against losses and provide stability when markets decline.
In investing, such assets are akin to Rodman’s rebounding: they don’t directly score (generate high returns) but significantly enhance the portfolio’s overall performance.
What Are Defensive Assets?
Defensive assets come in many forms, each suited to different market conditions. Let’s explore some examples:
1. Cash and Cash Equivalents
Cash is the ultimate defensive asset, offering liquidity and the ability to capitalize on opportunities during market downturns. Holding cash in high-yield savings accounts or money market funds can also provide modest returns while preserving capital.
2. Gold and Precious Metals
Gold is a historical hedge against inflation and economic uncertainty. It has outperformed equities during crises such as the Great Depression, stagflation in the 1970s, and the 2008 financial crisis. Investors can gain exposure through physical gold, ETFs like GLD, or mining stocks.
3. Dividend Aristocrats and Defensive Stocks
Companies in sectors like utilities, consumer staples, and healthcare tend to perform better during recessions. These “Dividend Aristocrats” consistently pay and increase dividends, providing stability and income. ETFs like NOBL or XLU offer diversified exposure to these defensive stocks.
4. Long Volatility Strategies
Advanced investors may explore options or volatility funds to hedge against market crashes. These strategies benefit from significant price swings, similar to how Rodman thrived in chaotic gameplay.
5. Real Assets and Collectibles
Real estate, rental properties, or even collectibles like art can serve as defensive investments. These assets often maintain or increase their value during economic downturns.
Defensive Assets in Your Personal Life
Beyond traditional investments, consider defensive assets in your daily life. These might include:
Homeownership: A paid-off or partially owned home is a stable asset.
Rental Properties: Generate passive income with potential for long-term appreciation.
Steady Employment: A reliable job with consistent income provides financial resilience.
Sustainable Living Investments: Solar panels or energy-efficient appliances reduce expenses and provide long-term savings.
These assets contribute to financial stability and help you weather economic storms.
Conclusion: Build a Team, Not Just a Portfolio
Dennis Rodman’s career demonstrates that defensive players are indispensable for success. Similarly, a robust investment portfolio requires assets that protect against downturns and balance offensive growth with defensive stability.
In today’s volatile market, the demise of the 60/40 strategy underscores the importance of diversification and defensive positioning. By incorporating cash, gold, defensive stocks, and other resilient assets, you can create a portfolio that thrives under pressure—just like Rodman on the court.
Ask yourself: Who are the “Rodmans” in your portfolio?
