Consumer staples cushion portfolio in hard times

Worried about the economy? Perhaps your family should tighten its belt a bit.

Stop using so much soap, for example. Don't clean the kitchen floor quite so frequently. If you have allergies, sneeze into your newspaper instead of a tissue. While you're at it, reduce your dog's food intake by one-fourth.

We all know that won't happen. That's why investors during worrisome times often turn to the stock of companies that produce household necessities.

As A.G. Lafley, the chief executive of Procter & Gamble Co., said of the recent slowing economy: "People are not reducing tooth-brushing incidence. They are not going to the bathroom less often. They are not shaving meaningfully less often."

Consumer staples include household products such as laundry detergent and deodorant, as well as food, drugs, beverages and tobacco. Because of the constant and predictable demand for such products, they're considered defensive investments to reduce portfolio risk.

These stocks had a price run-up on growing economic fears last year and have slipped back a bit this year. The reason to invest now is if you believe the economy is going to worsen.

Yet however the economy performs, such household names are frequently counted upon to provide a foundation for a personal portfolio. They are becoming increasingly global in their reach.

Another plus is that you can actually understand what they do.

"If there are signs of economic recovery sometime this year, you can expect this group to lag, but until then it will be front and center," said Jack Russo, senior consumer analyst with Edward Jones in St. Louis. "While there is some concern that domestic growth is slowing for these companies, they do have broad international exposure."

The prices that these firms pay for the materials used to make their products have been on the rise, but that isn't the worry that it once was.

"Pressure from commodity prices began in 2003, and around 2004 the companies were able to raise prices," said Steven Ralston, analyst with Zacks Investment Research in Chicago, noting that productivity gains have also accelerated. "The consumer is willing to accept price increases more readily now, so they have become a non-issue."

There are many ways to play the consumer staples.