Defensive investment strategies to shield your portfolio from market volatility

Defensive investment strategies can protect your portfolio from market volatility while maintaining steady returns

THE YEAR 2025 has been a turning point for the global stock market, but not in a good way. Extreme instability and unpredictable government policies have defined the year. The steady growth investors enjoyed in late 2024 ended abruptly in April 2025, specifically during the Independence Day and Liberation Day market crashes.

New, aggressive trade tariffs triggered a market crash that wiped out $6.6 trillion in global wealth in just 2 days.

The shockwaves were immediate. Market fear levels, measured by the CBOE Volatility Index, surged to some of the highest readings ever recorded, rattling even seasoned investors. Portfolios that once felt diversified suddenly seemed exposed, and confidence gave way to caution.

In times like these, defensive investment strategies can protect your portfolio from market volatility.

Defensive investing is all about reducing risk while maintaining steady returns, especially during periods of market volatility. Instead of chasing the hottest stocks or betting big on rapid growth, defensive investors focus on stability, reliability, and preservation of capital.

Below are a few defensive investment strategies that can shield your portfolio from market volatility.

#1 Tilt Your Portfolio Toward Defensive Sectors

During economic downturns, households may defer discretionary expenses like luxury travel or new vehicles. But the demand for staples and utilities remains remarkably resilient. Invest in these, for these are defensive sectors.

The consumer staples sector is an excellent example. It includes companies that produce food, beverages, hygiene products, and household goods. These are items that people simply cannot go without.

Firms in this sector often possess strong pricing power. They can pass increased costs to consumers. During the 2022 to 2023 inflation spike, Procter & Gamble successfully raised prices on essentials like Tide and Gillette. As these are low-cost daily necessities, consumers choose to absorb the price hikes rather than switch to cheaper alternatives.

Healthcare is traditionally considered defensive. People need medical care regardless of economic turmoil. Large diversified firms, in particular, offer stability. Johnson & Johnson is a prime example. It spans pharmaceuticals, medical devices, and consumer products. This diversification reduces the impact of single-product failures. 

Utilities are another quintessential defensive sector. They provide power, water, and gas under regulated structures. This leads to stable and predictable earnings. 

#2 Double Down on Dividend-Paying Stocks

Dividend-paying stocks are a cornerstone of defense. Dividends represent a portion of the company’s profits. They are paid out regularly to shareholders. So, they allow you to earn a consistent income while staying invested for the long term.

In the United States, two elite groups of dividend payers are popular: Dividend Aristocrats and the Dividend Kings.

Dividend Aristocrats are companies in the S&P 500 that have successfully raised their dividend payments every year for at least 25 years straight. Meanwhile, Dividend Kings are firms that have increased dividends for 50 or more consecutive years. 

In Canada, railroads are considered good long-term investments. Two dominant players are Canadian National Railway (CNR) and Canadian Pacific (CP). This has led investors to compare CP vs CNR when evaluating dividend stability and growth potential.

CNR offers a solid 2.1% dividend yield to pocket, plus the potential for your investment to grow over time. It has doubled in value over the last 10 years.

The technical profile of CP is better than that of CNR, however. ValueTrend notes that shares are currently stabilizing at a long-term support level of $95 CDN, $70 USD. This price point has acted as a reliable floor for the stock since 2023, mirroring the price action seen in CNR.

#3 Consider Low-Volatility Funds

Low-volatility investing is based on a persistent market anomaly. Historically, lower-risk stocks have delivered competitive long-term returns.

These stocks tend to experience smaller price fluctuations. This makes them ideal for core strategic allocations. They help investors stay confident during tumultuous times. Allocating 15% to 20% of your portfolio to low-volatility funds can make your portfolio defensive.

Low-volatility funds use statistical models to select stocks. The iShares MSCI USA Minimum Volatility (USMV) exchange-traded fund (ETF) is a leading example. It tracks an index of equities with lower risk characteristics. Its objective is to capture market gains with less downside risk. 

Another approach is used by the Invesco S&P 500 Low Volatility ETF (SPLV). This fund selects the 100 least volatile stocks in the S&P 500. It is rebalanced quarterly to maintain this low-risk profile. 

In early 2025, low-volatility ETFs significantly outperformed the market. By late March, USMV was up 4.9% year-to-date. During the same period, the S&P 500 (SPY) suffered a 1.5% loss. This gap was driven by uncertainty regarding international trade policies. Low-volatility stocks provided a sanctuary from these macro concerns.  

Balancing Protection and Growth

Constructing a defensive portfolio doesn’t mean you must retreat from the market. Rather, it is about fortifying one’s position to withstand the inevitable storms.

Defensive strategies often lag the market during aggressive bull runs. But they offer a superior Sharpe ratio, meaning they provide more return for every unit of risk taken. Over the long term, the compounding effect is the most powerful tool for wealth creation.

So, follow these tips, and you can build a portfolio that is designed to endure uncertainty rather than fear it.