Last updated: March 2026
Defence is the best offence
In investing, protecting your capital is often more important than swinging for the fences. A simple mathematical truth illustrates this: if your portfolio loses 50% of its value, you need a 100% gain just to get back to where you started. Preserving your hard-earned gains therefore becomes an absolute priority, especially once your capital starts to represent a significant share of your net worth.
After more than 25 years of investing and having navigated several major crises (2000–2003, 2008, 2020, 2022), I have learned that a well-calibrated defensive approach makes all the difference. It is not about fearing markets — it is about discipline and a strategy tailored to your profile and circumstances.
In this article, I present 4 concrete, tested and quantified defensive strategies to help you navigate turbulent periods with confidence while maintaining long-term capital growth.
Strategy #1: trailing stops — stock-by-stock protection
Trailing stops (TSL) are automatic sell orders triggered when a stock falls a certain percentage from its high. Their primary objective — more than protecting against broad market crashes — is to avoid falling knives on individual positions.
Setup and usage
I recommend setting trailing stops at 15% or 20% with monthly manual review — no automatic orders placed with the broker. Why manual? Because it avoids whipsaws caused by intraday volatility. Once a month, check whether any stock has lost 15–20% from its recent high, and if so, exit the position.
This approach saved me from significant losses on positions such as Orior in 2018, where the trailing stop allowed me to exit before the stock collapsed entirely.
You can read the full detail of this defensive strategy in my article "What to do when a stock nosedives".
Backtest: TSL during the 2008 crisis
I ran a backtest of a 15% trailing stop strategy on the S&P 500 from 2004 to 2026. Here are the results:
- Total return: TSL 15% = +508.84% vs Buy & Hold = +480.06%
- CAGR: +0.24% annualised in favour of TSL (marginal difference)
- Max Drawdown: TSL = -53.99% vs Buy & Hold = -57.06% (-3 points of protection)
An honest interpretation
The numbers are clear: a trailing stop does NOT protect you from a systemic market crash. In 2008, the TSL strategy lost almost as much as buy & hold (-40% vs -41%). Why? Because when the entire market collapses, the TSL triggers individual sells — but you keep buying other stocks that are also falling.
This raises the question of combining trailing stops with another defensive strategy that also covers systemic risk (see strategies #2 and beyond).
The real strengths of TSL lie elsewhere:
- Stock-by-stock protection*: avoiding individual stocks that collapse 70–80% (falling knives)
- Emotional discipline: a mechanical process, no emotional decision-making
- Cumulative effect: over 20+ years, +0.24% annualised makes a real difference
- Momentum: academic research shows that momentum is highly effective at avoiding persistent losers
*The TSL strategy does not catch ALL falling knives. Since the monthly review only happens once a month, a very sharp and rapid drop can slip through the cracks. That is the price to pay for avoiding overly frequent false signals. Based on my backtests and experience, monthly frequency is a good compromise.
Who is it for?
Trailing stops are particularly useful if you practise stock picking (selecting individual equities). For a 100% passive ETF portfolio, their usefulness is more limited.
Since October 2024, I have increased the frequency of my rebalancing (see my October updates), which makes trailing stops less necessary since my positions are reviewed more regularly. But for investors who check and rebalance quarterly, semi-annually or annually, it remains a valuable tool.
Strategy #2: moving averages and US unemployment rate
As we have just seen, the TSL approach limits idiosyncratic risk (specific to the stock), but is far less effective at reducing systemic risk (a broad market decline).
Moving averages
Moving averages, particularly the 200-day MA, help detect market trend changes and reduce volatility by 4 percentage points according to J. Siegel in "Stocks for the Long Run", while offering protection against bear markets despite a cost in transaction fees.
US unemployment rate
The US unemployment rate, as I demonstrate in "Les Déterminants de la Richesse", is an effective economic signal. When this rate crosses its 12-month moving average, it anticipates recessions (crossing upward) or recoveries (crossing downward).
The MM-UI indicator
Combining the price moving average with the unemployment rate (MM-UI indicator) proves particularly powerful. You stay invested in buy & hold as long as unemployment is trending downward. If unemployment rises, you follow the 200-day market moving average and move to cash if prices fall below it.
Results
Over 1930–2015, this combined strategy generated 1.5 additional percentage points of return with 5 fewer points of volatility. My backtest over the more recent period, 1999–2025 (in CHF), yields similar results:
| Metric | MM-UI | S&P 500 |
|---|---|---|
| CAGR (%) | 7.67 | 6.14 |
| Max Drawdown (%) | -44.23 | -65.84 |
| Volatility (%) | 13.76 | 16.51 |
| Sharpe Ratio | 0.47 | 0.33 |
| Sortino Ratio | 0.64 | 0.44 |
Strategy #3: defensive allocation — diversifying with uncorrelated assets
Reducing exposure to volatile equities in favour of more stable assets (bonds, gold, cash) is an effective defensive strategy. Unlike trailing stops that protect stock by stock, defensive allocation reduces the overall volatility of your portfolio.
Comparison of 6 defensive allocations (2011–2026)
I compared the performance of 6 different portfolios since April 2011. Here are the results (in CHF):
| Portfolio | CAGR | Sharpe Ratio | Max Drawdown |
|---|---|---|---|
| PFD | 12.2% | 1.84 | -15.0% |
| PP 2.x | 10.5% | 1.13 | -21.6% |
| Golden Butterfly | 7.0% | 0.78 | -18.9% |
| 60/40 Boglehead | 6.1% | 0.64 | -26.3% |
| All Weather | 6.1% | 0.63 | -23.5% |
| Classic PP | 6.1% | 0.71 | -15.2% |
Key takeaways
1. A defensive allocation does not necessarily mean mediocre performance: my PFD portfolio combines superior returns (12.2%) AND reduced volatility (Sharpe 1.84). How? Through a rigorous quantitative approach with frequent rebalancing, combined with several defensive strategies including those covered in this article.
2. The 60/40 Boglehead is showing its limits: with a maximum drawdown of -26.3% (worst of all), the 60% equities / 40% bonds portfolio no longer provides meaningful protection. The reason: bonds suffered heavily in 2022 as interest rates surged.
3. The Permanent Portfolios (classic and 2.x) offer a solid compromise: my PP 2.x (10.5% CAGR, -21.6% MDD) and the classic PP (6.1% CAGR, -15.2% MDD) protect effectively without entirely sacrificing returns.
4. The Golden Butterfly remains an excellent intermediate option: see my full analysis in the article Golden Butterfly Portfolio backtest CHF.
5. Ray Dalio's All Weather Portfolio, heavily loaded with bonds, does not quite live up to its name.
Shannon's Demon: the magic of rebalancing
Claude Shannon, father of information theory and brilliant investor (28% annual return over 30 years), demonstrated a fascinating mathematical principle: systematic rebalancing between two uncorrelated assets generates alpha, even if one of them has zero return.
The key formula:
CAGR ≈ Average Return - (Volatility² / 2)
Volatility squared means its drag on compounded returns is quadratic. By halving volatility through rebalancing, you reduce its cost by a factor of four.
Concrete example: Imagine an asset that returns +50% one year and -33.3% the next. Arithmetic return = +8.35%, but real CAGR = 0% (volatility drag). If you rebalance 50/50 with cash after each year, your CAGR becomes +2% even though cash earns nothing. That is the magic of Shannon's Demon.
Practical application in my portfolios
This approach sits at the heart of my portfolios. By systematically rebalancing between asset classes, I capture volatility to generate gains without any market timing.
My 2022 experience: proof by example
In 2022, while the Swiss market (MSCI Switzerland) lost -17.8%, my PFD fell only -3.9%. This nearly 14-point gap was not luck or market timing — it was the direct result of a rigorously backtested defensive allocation, systematically rebalanced. Full details are available in my 2022 performance review.
Strategy #4: prioritising value and quality
In my portfolios, I use both defensive blue chips and small caps. What matters is not the size of the company, but its intrinsic quality combined with attractive valuation. Relatively cheap stocks with solid fundamentals hold up better during bear markets than speculative ones.
The criteria I systematically review:
- Value ratios: P/E, P/B, EV/EBITDA... (see the article How to analyse a value stock)
- Quality: Piotroski score, profitability, earnings quality, debt level...
A concrete example of a quality defensive stock: Emmi (EMMN), Switzerland's leading dairy group. Solid cash flows, stable dividends, moderate volatility, predictable business model.
Quality stocks do not protect you entirely from crashes, but they typically hold up better and rebound faster and stronger. Above all, they avoid the bankruptcy and catastrophic collapse risk found in speculative companies.
I ran a backtest on a portfolio of 50 stocks selected within the S&P 500, from 2004 to 2025 inclusive, using a single quality criterion (Piotroski score > 5) and a single value criterion (EV/EBITDA < 10). The results are telling:
| Metric | Q+V Portfolio (50 stocks) | S&P 500 |
|---|---|---|
| CAGR (%) | 8.45 | 8.27 |
| Max Drawdown (%) | -49.26 | -57.06 |
| Volatility (%) | 16.68 | 15.14 |
| Sharpe Ratio | 0.49 | 0.51 |
| Sortino Ratio | 0.64 | 0.68 |
Overall, the differences between the portfolio and the index are small. The CAGR is marginally higher, but so is volatility. The compelling finding, however, is that the maximum drawdown is nearly eight points lower. Looking more closely at the two worst years for the market over this period:
| Return in CHF (%) | Q+V Portfolio (50 stocks) | S&P 500 |
|---|---|---|
| 2008 | -32.36 | -40.68 |
| 2022 | +7.68 | -17.07 |
The gap between the two approaches was especially striking in 2022, at nearly 25 percentage points. Quality and value did not merely limit the drawdown — they actually generated positive returns.
Other strategies
I have never used options (puts, calls, collars) because I do not understand them well enough. In investing, the golden rule is simple: if you do not understand it, do not touch it.
That said, within my PFD I use additional approaches to limit — and even exploit — systemic risk. The Trading Auto Signal, for instance, aims to generate positive returns in any market condition using a combination of ETFs.
Alongside the Trading Auto Signal, I also use a dynamic hedging system for my "International Equities" strategy using the leveraged ETFs TZA (-3x) and QLD (+3x).
Which strategy for which profile?
There is no one-size-fits-all solution. Your defensive strategy must be adapted to your personal situation and temperament. To find out which investor profile you fit, I invite you to take my free personality tests.
- Cautious beginner (low risk tolerance) → defensive allocation: Golden Butterfly or SRFCHA (real estate funds)
- Balanced intermediate (average risk tolerance) → moderate allocation: PP 2.x
- Experienced, comfortable with volatility (high risk tolerance) → flexible allocation based on market conditions: PFD (quantitative approach)
Conclusion: your personalised defence
There is no universal defensive strategy. The right approach depends on your age, experience, knowledge, capital, psychology and life stage (accumulation vs withdrawal).
Remember: a well-calibrated defence gives you the peace of mind needed to stay the course during inevitable crises. And that psychological resilience is often worth more than a few extra percentage points of return.
Frequently asked questions
Do trailing stops really protect against a stock market crash?
Trailing stops primarily protect against collapses in individual stocks (falling knives), not against systemic crashes. During the 2008 crisis, a TSL 15% strategy on the S&P 500 lost around -40%, almost as much as buy & hold (-41%). Their real strengths are emotional discipline, avoidance of bankruptcy-prone stocks, and a marginal CAGR gain compounded over 20+ years.
Which defensive allocation offers the best risk-adjusted return?
Based on my 2011–2026 backtests in CHF, the PFD portfolio delivers the best profile with a CAGR of 12.2%, a Sharpe Ratio of 1.84 and a maximum drawdown of just -15%. For investors seeking a strong compromise without active management, the PP 2.x (10.5% CAGR, -21.6% MDD) or the Golden Butterfly are excellent alternatives.
Is the 60/40 portfolio still a reliable defensive strategy?
No, it has shown its limits since 2022. With a maximum drawdown of -26.3% over the tested period (worst of all portfolios compared), it no longer provides effective protection. The main reason: bonds fell sharply in 2022 as interest rates rose aggressively, removing their traditional role as a shock absorber.
What is Shannon's Demon and how do you apply it?
Shannon's Demon is a mathematical principle showing that systematic rebalancing between two uncorrelated assets generates alpha, even if one of them earns nothing. In practice, regularly rebalancing your positions (for example between equities and gold) allows you to harvest volatility and improve your CAGR without any market timing.
Do you need a high savings rate to reach financial independence?
No. A savings rate of around 20%, combined with a sound investment strategy and the elimination of professional expenses post-retirement, is sufficient to reach financial independence in under 20 years. The defensive strategies presented in this article help you stay the course through crises without sacrificing long-term performance.
Sources and data
- PFD performance 2022: 2022 annual review
- PFD performance 2020: 2020 annual review
- Shannon's Demon: Market Sentiment (2023)
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