Last Monday, the Dow dropped 777 points, the greatest one-day point drop in history and the biggest percentage loss since September 2001. This Monday, the Dow dropped as many as 800 points before recovering some of that back prior to the closing bell.

Year to date, the S&P 500 is down more than 30%. Investment banks are no more, credit is largely frozen, housing prices continue to drop, unemployment continues to rise, food and oil prices are creeping still higher, and Congress has taken extreme measures to try to turn things around.

What are investors doing? According to The Boston Globe, investors are largely fleeing the markets for what have historically been less-risky investments such as CDs, money markets, and short-term Treasuries -- even as interest rates on the Treasuries sunk below 1%. In fact, year to date, stock mutual funds have lost net nearly $68 billion, while taxable bond mutual funds have gained net nearly $72 billion.

If there were ever a time for a defensive play, you'd think this would be it. And in fact, a lot of ink has been spilled this year touting the virtues of classic defensive plays such as Pfizer (NYSE:PFE), Coca-Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG) -- some of it on this website.

After all, the story goes, even when times are tough, people will still eat, they'll still heat their homes, and they'll still buy their medicines.

But if you've been putting your money in blue-chip consumer staples, pharmaceuticals, and utilities on the theory that it will be relatively safe there, you may want to think again.

First, it's not working
While defensive plays may have worked in previous downturns, they aren't working in this one. The collapse of the financial markets only intensified already-existing economic strains on the American family, including rising food prices, rising heating oil prices, rising foreclosure rates, and rising unemployment.

The American family is having to make choices -- and the old standbys are often on the chopping block.

For example, The Wall Street Journal is reporting that the number of prescriptions filled in the U.S. fell 0.5% year over year during the first quarter of the year -- and fell 1.97% during the second. It's the first time prescriptions have fallen in at least a decade. And that's not all: A survey by the National Association of Insurance Commissioners said that 22% of consumers are going to the doctor less often because they just can't afford it.

Food prices are increasing at the fastest rate since 1990, also according to The Boston Globe. And a USA TODAY/Gallup poll from April reported that 46% of Americans were experiencing increasing food prices as a financial hardship. And prices have only gone up.

All of this is having a negative effect on "defensive" stocks. Drug manufacturers are down 19% year to date, food manufacturing is down 18%, and grocery stocks are down 30%. Even utilities aren't escaping: Electric utilities are down 33%, and water utilities are down 38%.

While a couple of these sectors haven't lost you as much money as the market at large, there's still a clear trend: down, down, down.

Even the strongest stocks in those categories have struggled. Pfizer is down 19% year to date, Safeway is down 33%, UnitedHealth Group (NYSE:UNH) has lost 65%, and Walgreens (NYSE:WAG) has lost 29%. Even Coca-Cola is down 18%.

It turns out that when things get bad enough -- and a collapsed housing market, rising food prices, and a shaky financial sector count as "bad enough" -- people do cut back on even the essentials.

In other words, while a defensive play may cushion the blow, it really isn't going to save your portfolio right now.

Second, it's a bad strategy
But even when macroeconomic factors don't conspire against the defensive play, it's still not a good strategy for your money.

Essentially, a defensive play is a "next hot sector" play -- only when times are tough, investors are content to find the "next not-as-bad sector" instead of the next hot one. But just as chasing hot performance will likely leave you empty-handed, investing in defensive plays when times are tough just because they're defensive plays will undermine your long-term returns. Why?

  1. It's historical, not forward-looking. The "next hot sector" is only apparent after it's warmed up -- and that means it's likely to cool down. Just ask anyone who was invested in tech stocks in early 2000 -- just because it was hot doesn't mean it was sustainable. And just because so-called defensive stocks are in historically stable industries doesn't mean the companies or the industry in question won't be rocked by events no one saw coming. Remember, up until this year, financials were believed to be defensive stocks, too.
  2. It doesn't focus on the company. Even assuming an industry holds up against downward market pressure, it doesn't mean an individual company will come out smelling like a rose -- and just because a sector takes a nosedive doesn't mean a company will. Adobe Systems (NASDAQ:ADBE), for example, has returned 22% annually over the past 10 years -- bypassing the tech bust entirely.

The Foolish bottom line
So if you want to stay in stocks (and if you have money you don't need for the next five years, you should), where you should invest? Rather than trying to find stocks that won't lose very much in the turmoil, you should be looking for companies with excellent management, strong competitive advantages, excellent prospects, and strong balance sheets -- because those will outperform over time, even if the near-term still looks stormy. Buying and holding is still the best choice for the majority of your portfolio -- especially when so many stocks are trading at unbelievable lows.

That's what we're doing at Motley Fool Pro, the new investing service that opened yesterday -- but that's not all we're doing. Fool co-founder David Gardner and his Motley Fool Pro team are investing $1 million in a portfolio designed to make money in any market.

In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

At the time of publication, Julie Clarenbach had no stake in any company mentioned in this article. Pfizer, Coca-Cola, and UnitedHealth are Motley Fool Inside Value recommendations. Pfizer and Johnson & Johnson are Income Investor choices. UnitedHealth and Electronic Arts are Stock Advisor picks. The Motley Fool owns shares of Pfizer and UnitedHealth. The Motley Fool's disclosure policy plays offense, not defense.