Friday, 15 May 2009 13:06
Rebalancing your asset allocation among various types of investments isn't the only possibility for coping during volatile periods in the stock market. At such times, many investors reexamine their allocation to such defensive sectors as consumer staples or utilities (although, like all stocks, those sectors involve their own risks).
Defensive sectors include industries that tend to experience relatively stable demand for their goods and services, regardless of whether the economy is doing well or poorly. That doesn't mean businesses in those industries are completely immune from economic hard times, and their stocks certainly can be affected by overall market movements as well as by problems within individual companies. However, the ups and downs of stocks considered "defensive" have generally been a bit less dramatic than in sectors where revenues are heavily affected by the economic climate (past performance is no guarantee of future results, of course).
Dividends also can help cushion the impact of price swings. Dividend income has represented roughly one-third of the monthly total return on the Standard & Poor's 500 since 1926. According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s--in other words, more than half that decade's return resulted from dividends--to a low of 14% during the 1990s, when investors tended to focus on growth.
Content Prepared by Forefield Inc.
