The Hidden Power of Commodities in Volatile Markets
Chasing rising stocks can be tempting – but those gains can quickly disappear during market volatility. While you may want to pour money into the latest hot investment trends, the best moves are often boring.
Utilities and consumer staples are often seen as key portfolio anchors that can hold up in any economic cycle, and help limit your losses during a sharp correction. Here’s what you need to know about sectors that may not seem as exciting as the rising markets, but can help you reach your long-term financial goals.
Goodness of utilities and consumer staples stocks
There is constant demand for essential services, gas and water. That makes the income and net profit of these sectors more reliable and less subject to sharp price fluctuations. People will need services in any economy – and they are more likely to give up eating out or shopping and prioritize priorities.
Utility stocks may not beat the S&P 500, but they are known for high dividend yields and low volatility. Some utility stocks work similarly to bonds with their limitations and high cash flows, but the gains are taxed more favorably than bond interest.
While people can voluntarily cut back on spending when finances are tight, it’s a different story for consumer staples like food, hygiene products and cleaning supplies. These products not only generate sales in any economy, but the businesses behind these products have pricing power.
A slight increase in the price of groceries will not stop people from shopping. Consumer staples can turn into an important inflation hedge that provides long-term cash flow. However, like utility and infrastructure stocks, investments in the consumer staples industry have not been known to beat the S&P 500.
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The power of fixed benefits
Strong, long-duration stocks tend to offer consistent dividends that are distributed quarterly. Companies that issue their own dividends also tend to increase their payouts every year, if they can. Regular dividend increases indicate good financial health for shareholders (but any suspension of dividend increases can cause investors to lose confidence).
These types of stocks may be even more valuable for people approaching retirement. Retirees and people in their prime can benefit from these types of stocks as they combine low risk with high cash flow.
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Why you should add ‘boring’ stocks to your portfolio
Strong earnings and strong fundamentals can often do more for your portfolio than spending time trying to find the next stock to take off, which is very difficult to do, even for experts on Wall Street.
Each investor should adjust their portfolios based on their financial goals and risk tolerance. Keep in mind that while defensive stocks can help limit losses during a downturn, they are likely to trail their counterparts during a bull market.
Investors can choose to buy individual stocks in these defensive sectors or funds that contain these types of stocks. Both methods reduce your risk while opening the door to potential upside.
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