Personal Investors' Defensive Asset Allocation "Guide"

In financial markets, many individual investors chase highs and establish positions when the market is booming. When the wind shifts, they become fearful and sell in panic, falling into the loss trap of “buying the highs and selling the lows.” In this situation, an asset allocation approach of “stability as the foundation” is especially important. This article focuses on clarifying the meaning, categories, and allocation strategies of defensive assets, with the goal of helping individual investors build a solid layout and optimize their asset structure.

The Concept and Role Positioning of Defensive Assets

Defensive assets generally refer to investment tools with low risk, low volatility, and high capital safety. Their main function is to provide steady capital preservation while offering emergency liquidity and stable cash flow. In household asset allocation, they are the cornerstone of the “pyramid” of wealth management—used to support living expenses and provide a risk buffer. This includes bank deposits, government bonds, low-risk bonds, high-quality insurance products, and more. The biggest features of these assets are low risk and strong liquidity, though their returns are relatively limited.

Defensive assets differ from “safe-haven assets” and “value-preserving assets” in traditional concepts. The latter more often refers to tools such as gold, overseas assets, and real estate used to hedge against inflation or geopolitical risk, and their prices may also swing sharply. Defensive assets, by contrast, place greater emphasis on risk control and stability. Defensive assets serve as the “safety base” of an asset portfolio, playing a key role in capital preservation, liquidity provision, and smoothing cash flow. They can effectively help offset losses caused by extreme market volatility.

Categories of Defensive Assets That Can Be Included

● Government Bonds and Reverse Repo of Government Bonds

Risk: Essentially risk-free, supported by government credit guarantees; default risk is extremely low.

Return: Current government bond yields are already low. For short term (within 1 year) government bonds, the annualized yield is around 1%. For medium to long term government bonds (5–10 years), the annualized yield is only slightly above 2%, with low volatility.

Liquidity: Strong liquidity; can be traded in the secondary market. Reverse repos of government bonds are ultra-short-term, low-risk interbank lending instruments. For example, the 7-day reverse repo rate is around 1.4%, liquidity is extremely high, and they can be used for cash management and overnight arbitrage.

Suitable for: Investors who prioritize principal safety and are willing to give up part of their return in exchange for extremely high safety.

Market situation: Since the second half of 2025, in the People’s Bank of China’s open market operations, the 7-day reverse repo rate on government bonds has often been in the range of 1.3%–1.5%. Investors can achieve low-risk capital appreciation by subscribing to government bonds and reverse repos through bank counters, broker fixed-income channels, or through exchange offerings.

● Bank Deposits and Large-Certificate-of-Deposit (CD) Products

Risk: Bank deposits are deposit-type financial products and enjoy deposit insurance coverage of 500k yuan per single bank, making them extremely safe.

Return: Deposit rates are currently relatively low. For example, the 1-year fixed deposit rate is only about 0.95%. The yield on large CDs is slightly higher and the flexibility is also stronger. For instance, among the large CD products first issued by Bank of China in 2025, the 1-year annualized yield is 1.2%, the 3-year yield is as high as 1.55%, and the product supports partial early withdrawals.

Liquidity: Demand deposits have the highest liquidity and can be used at any time. Time deposits have lower liquidity. Large CDs can be withdrawn early and transferred according to agreed rules, sitting between the two.

Suitable for: Investors with low risk appetite who seek stable returns and are willing to accept lower interest rates in exchange for liquidity and principal protection.

● Policy Financial Bonds and High-Rated Financial Bonds

Risk: These bonds are generally issued by state policy banks or large state-owned financial institutions. Typically they are rated AAA or have national credit standing, with risk only slightly higher than government bonds.

Return: Usually slightly higher than government bond yields of the same period. For example, in 2025, the issuance yields for AAA-rated financial bonds are often around 2%, which is a bit higher than yields on long-term government bonds.

Liquidity: Traded in both the interbank and exchange markets, with good liquidity.

Suitable for: Investors who are willing to take on extremely low credit risk to obtain a slightly higher yield. Because policy financial bonds are backed by government credit, they are often viewed as solid allocation targets. Investors can allocate such high-rated bonds through bank counters or via bond funds and wealth management product channels to improve portfolio returns.

● Highly Liquid Money Market Instruments (money market funds, short-term bond funds, etc.)

Risk: Money market funds and ultra-short-term bond funds mainly invest in short-term bonds, bills, and interbank CDs with high credit quality. Their risk is only slightly higher than deposits.

Return: In recent years, the yields of such products have been steadily declining. By the end of 2025, the average 7-day annualized yield of money market funds across the whole market was only around 1.25%. Most large-scale money market funds were also roughly 1%–1.5%. A small number of higher-yield money market funds, by allocating to higher-yield short-term notes, can reach above 1.8%.

Liquidity: Extremely high. You can subscribe and redeem at any time, with no fee or only minimal subscription and redemption fees.

Suitable for: Investors who focus on cash management and want to avoid “stampede risk” rather than chase speculative returns.

Market situation: The annualized yield of Yu’e Bao, the largest money market fund nationwide, is about 1.04%. Ordinary investors can buy such money market funds or short-term bond funds through fund company official websites, banks, and third-party platforms (such as Alipay, Wealth Management Connect, and broker direct fund platforms, etc.), as cash substitutes and short-term liquidity tools.

● High-Quality Short-Term Corporate Bonds and Convertible Bonds

Risk: High-quality corporate bonds refer to corporate bonds or short-term financing notes from issuers with high credit ratings. AAA-rated corporate bonds have relatively low risk and can be part of a conservative allocation. Convertible bonds are bonds that come with stock conversion rights; their risk lies between ordinary bonds and stocks.

Return: In 2025, the issuance yields for AAA-rated corporate bonds are usually around 2%. For example, at the end of 2025, the average issuance yield for AAA-rated credit bonds was 2.04%. Convertible bonds, due to their equity features, usually have lower coupon rates (typically below 1%), but they offer upside potential if the stock price rises.

Liquidity: Tradable in the secondary market, with relatively active trading. Convertible bonds are generally easier to buy and sell because the underlying stocks tend to have good liquidity.

Suitable for: Investors who can tolerate a bit more risk and hope to obtain returns higher than fixed-income products. In the near term, the convertible bond market has been active, and convertible bond funds have performed well. Investors can buy corporate bonds on a securities firm trading platform, or participate in the convertible bond market through fund channels.

● Structured Deposits and Annuity Insurance

Risk: Structured deposits are products where the principal is protected through a bank’s fixed-term deposit, and returns are linked to market underlying assets (such as stock indexes, exchange rates, etc.). Principal is generally protected, but returns have an upper limit. The main risk is the volatility of the underlying. Annuity insurance is essentially pension insurance; it usually has principal protection and provides fixed pension income, with risk borne by the insurance company.

Return: If the underlying of a structured deposit experiences limited volatility, the returns will be close to the fixed deposit rate; if the underlying performs well, investors can obtain additional returns. Annuity insurance yields are stable. For some current products, the guaranteed/pre-set interest rate is above 2.5%, and the actual cumulative return can be 3%–4% (depending on fees and the term).

Liquidity: Structured deposits have relatively poor liquidity and generally require holding until maturity or meeting special conditions to redeem. Annuity insurance has the lowest liquidity and is long-term locked-up capital.

Suitable for: Investors who seek higher returns but still require principal safety may consider allocating an appropriate amount. Structured deposits can be purchased at banks (counter or online banking). Annuity insurance must be underwritten through insurance company channels to secure steady cash flow in the future.

How to Allocate Defensive Assets?

Under the overall idea of “stability as the foundation, layered allocation,” an individual investment portfolio should clearly define three layers of function: the defensive layer provides capital preservation and liquidity protection; the flexible layer provides steady, enhanced excess returns; and the growth layer provides long-term capital appreciation. For individuals with moderate or above wealth-management capability, the reasonable target range is typically: defensive layer 40%–60%, flexible layer 20%–30%, and growth layer 10%–30%. However, the exact proportions depend on age, household liabilities, income stability, investment goals, and liquidity needs.

First, build a funding emergency reserve pool. It is recommended to prepare cash or cash equivalents covering 3–6 months of living expenses first, and place it in the most liquid instruments—such as bank demand deposits or daily interest-bearing products, 7-day government bond reverse repos, and highly liquid money market funds. Set up monthly automatic transfers or automatically divert salary into the emergency account to achieve forced savings. When choosing money market funds, focus on the 7-day annualized yield, fund size, the redemption settlement time, and the issuer’s background, prioritizing products with steady scale and fast redemptions. The core of the emergency pool is that it can be converted to cash at any time and that principal safety is guaranteed. Therefore, it is essential not to invest it in instruments with obvious drawdown risk or long lock-up periods.

Second, construct the core defensive layer and implement duration management and laddered allocation. The defensive layer should primarily use government bonds, policy financial bonds, AAA-rated financial bonds, bank time deposits and large CDs, short-term bond funds, etc., aiming for principal safety and stable yields. For implementation, the “ladder method” is recommended: for example, divide the funds planned for the defensive layer into several equal parts, distributed across bonds or CDs with maturities of 1 year, 2 years, 3 years, 4 years, and 5 years. Each time part matures, reinvest it when opportune or use it as a liquidity reserve. By diversifying the risk points of reinvestment rates at maturities, you reduce the sensitivity of duration to interest rate changes. In terms of purchase channels, government bonds and reverse repos can be traded directly via banks or brokers; policy financial bonds and high-rated financial bonds can be bought at bank counters or through broker fixed-income channels; short-term bond funds and money market funds can be subscribed via fund companies or third-party platforms. When selecting bond-type products, check the credit rating (preferably AAA/AA+ and above), the purpose of issuance, and whether there are put-back or redeemable clauses. Also consider issuance/trading fees and secondary-market liquidity. For large CDs, be sure to verify early withdrawal rules and the scope of deposit insurance coverage (for example, the coverage limit for deposits under the same bank or our bank), to avoid risks from excessive concentration.

Third, building the flexible layer emphasizes “steady progress.” This layer can allocate to short-term, high-rated corporate bonds, high-quality convertible bonds, hybrid or bond funds, and a small portion of high-rated short-term corporate financing notes. For individuals lacking the capability for credit research on a per-issuer basis, it is recommended to prioritize high-quality funds or ETFs, focusing on the fund manager’s credit research and portfolio management ability, while also monitoring the fund’s duration, position size (weight), and fee structure. Convertible bond funds can provide bond-like protection while also including an equity premium, making them suitable as part of a flexible allocation. However, you should set a cap on the exposure (for example, not more than 10% of total assets) and avoid using leverage to expand positions when volatility is high. When selecting, look at the conversion price, remaining term, implied volatility, and the underlying stock’s fundamentals—or alternatively use a convertible bond fund rather than trading a single convertible bond to diversify single-issue risk. The growth layer typically allocates more to equity-type assets and long-term thematic investments.

Fourth, pay attention to tool selection and execution details. When buying bond-type products, focus on the difference between yield to maturity (YTM) and the coupon rate, and choose products with transparent offering documents and high credit ratings. When choosing money market funds and short-term bond funds, look at the fund size, the manager’s history, and the redemption mechanism. For structured products and annuity insurance, you must fully read the terms and conditions to understand the conditions for principal protection, fees, and restrictions on early withdrawal, and never blindly pursue “principal protection + high returns” packaging. When using internet platforms, you must verify the platform’s credentials and third-party custody arrangements. With systematic and rule-based execution processes, individual investors can build a solid defensive base and, in a controllable way, capture medium- to long-term opportunities—achieving steady wealth growth in an uncertain market environment.

Case Study: Defensive Asset Allocation

● Case 1: Mr. Wang (45 years old, family’s main income earner, assets 3 million yuan, conservative risk preference)

Mr. Wang’s asset allocation targets “prioritizing stability while also considering value growth.” He divides assets into three layers: defensive layer 50% (1.5 million yuan), flexible layer 30% (0.9 million yuan), and growth layer 20% (0.6 million yuan). First, he builds an emergency reserve pool, setting aside about 0.3 million yuan (6 months of living expenses), with 0.2 million yuan placed in a money market fund (T+0 redemption) and 0.1 million yuan in a bank demand deposit, ensuring it can be accessed at any time in emergencies. For the remaining 1.2 million yuan in the defensive layer, he uses a “maturity ladder” setup: he buys large CDs and government bonds with maturities of 1 year, 2 years, and 3 years, and also allocates part of the funds to policy financial bonds (through a broker fixed-income channel). Each year, part of the funds matures and is rolled over into new investments to reduce the impact of interest rate volatility. In the flexible layer totaling 0.9 million yuan, he mainly allocates to short-term bond funds, AAA credit bond funds, and convertible bond funds to improve returns while controlling risk exposure. In the growth layer totaling 0.6 million yuan, he allocates to index funds and high-quality equity funds, entering in batches using monthly systematic investments.

● Case 2: Ms. Li (30 years old, no mortgage, assets 500k yuan, stronger ability to tolerate risk)

Ms. Li pursues long-term value growth, but she still insists on “defense at the foundation.” She divides her assets into defensive layer 40% (200k yuan), flexible layer 30% (150k yuan), and growth layer 30% (150k yuan). First, she sets up 50k yuan in emergency funds and places it in a money market fund or a 7-day government bond reverse repo (purchased via a broker APP), ensuring the funds can be withdrawn whenever needed. In the remaining defensive layer 150k yuan, she mainly allocates to large CDs with maturities of 1 year and 3 years (purchased via the bank’s APP), and also appropriately combines short-term bond funds to form a steady income base. In the flexible layer 150k yuan, she focuses on convertible bond funds and high-grade credit bond funds to capture the bond spread and the convertible bond’s flexibility-linked return, while ensuring that any single product’s allocation does not exceed 10% of total assets. In the growth layer 150k yuan, she allocates to broad-based index ETFs and sector/theme ETFs, using a monthly systematic investment of 2,500 yuan to avoid chasing highs all at once.

Author: Chu Mingye Tao Liang (the authors are, respectively, General Manager of the Jiangsu Equity Exchange Center and Deputy General Manager of the Credit Approval Department, Taizhou Branch of Jiangsu Bank)

Source: Financial Panorama · Wealth, Issue 3 of 2026

Responsible editor: Xue Xiaoyu

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