This month at The Motley Fool we've dedicated ourselves to getting back to basics, culminating on Sept. 25 with Worldwide Invest Better Day. With this in mind, my Foolish colleagues and I are unleashing vital information to help you invest better. In a previous article, we reviewed stock diversification, a key fundamental of investing. One by one, we'll take a look at the various stock sectors, focusing today on consumer staples.
The staples of consumer staples
Characterized by ubiquitous products and direct selling to customers, the sometimes-considered-boring consumer staples sector begs notice since consumer spending represents over two-thirds of U.S. GDP. We use staples products daily, consume them quickly, and think of them as necessities -- for example, deodorant and bottled water. Staples tend to be recession-resistant and more stable over time relative to other sectors, because people still need cereal and laundry detergent in both good economic times and bad. Using the MSCI World Index sector weightings as a benchmark, approximately 11% of your overall stock portfolio should be allocated to consumer staples.
How staples perform
Over long spans of time, staples firms are consistent high performers. In the past decade, staples returned 108% versus 96% for the S&P 500. And even though no sector was safe during the most recent recession, the staples sector held up better than the overall stock market, losing 28% compared to the market's 55% decline. That said, staples typically lag behind when the stock market is humming. During the recent stock run-up beginning March 2009, staples returned 101% versus 128% for the market.
What makes a staples company a household name for the long run?
Cutthroat competition and economies of scale give companies like Wal-Mart
Brand power is also a huge part of what makes staples companies successful. Case in point: 126-year-old Coca-Cola
Long-established staples companies have tapped out growth in developed markets, so most of their growth opportunities come from emerging markets. As per capita spending on staples products increases and emerging-market consumers' "wants" transition into "needs," greater quantities of household goods are purchased more often. While Procter & Gamble
An easy way to own the sector
If you're clueless when it comes to the consumer staples space, then consider exchange-traded funds. ETFs mimic the performance of an index, like the S&P 500, or provide specific exposure to certain sectors. Sector-specific ETFs like Consumer Staples Select Sector SPDR ETF are helpful when you lack information to hypothesize an investing thesis for a particular stock.
Become a better investor
If you bet wrong in the stock market, it could cost you. Instead, develop a strategy for adding all sectors to your portfolio. That way, regardless of what happens in the market, you can sleep well at night knowing a portion of your portfolio will prevail.
Join us for more investing basics on our microsite: Worldwide Invest Better Day. On the site, we've posted a plethora of articles aimed at helping you become an even more excellent investor.