The Small Investor's Guide  .  .  . New ideas for small investors

I know...I'll just move over to "safe stocks"! 

Again, all the advisors will tell you that you can simply ride out this recession by moving your money over to "tried and true" stocks that magically seem to weather recessions safely. These are companies that provide goods or services that, supposedly, people continue to want even if they are low on cash. The experts all publish the same lists: Johnson & Johnson (JNJ), Proctor & Gamble (PG), Coca-Cola (KO), General Electric (GE) and several others. They give various reasons why these stocks supposedly don't go down when nearly all others do. If it were that simple, wouldn't EVERYONE doesn't just do this, driving those stocks to absurd highs?

Before you blindly move any money from a "risky" stock to a "stable" stock, don't you owe it to yourself to at least see what those stocks did in prior recessions?  Since 1980, there have been only four official recessions:

Although not declared a recession, there was also a horrendous stock slide from January 2002 through February 2003, from which the S&P did not recover until almost two years later. Even though the other events met the requirements for recession, stocks didn't necessarily suffer as badly as in the 2002-3 non-recession!  

You call this safe? 

So, here's what happened to these "safe havens" during these reported recessions:

Recession S&P JNJ PG KO GE Comment
Early 1980 +9.4% -0.8% -3.7% +2.6% +10% Only GE beat the S&P
1981-82 +5.3% +22.7% +42% +22% +40% ALL beat the S&P
1990-01 +1.9% +24% +2.1% +21% +.4% JNJ and KO beat the S&P  
mid-2001 -7.7% +25% +4.9% -4.0% -12% JNJ and PG beat S&P strongly  
2002 -26% -10% +4.3% -13% -41% All but GE beat the S&P  

Keep in mind that inflation was running about 6 to 7% in 1980 to 1982 and in the range of 3 to 4% per year during most of the period from 1990 onward, at least according to government sources. It often seems much higher. 

So, what can we conclude from these results? None of the supposedly reliable stocks was actually reliable in all circumstances. The best performer of 1980 was the worst of 2002. JNJ did very well in 3 of 5 recessions, and near-worst in the other two. And all except PG did terribly in the most recent "non-recession." Unless you were lucky enough to pick the best ones in each recession, you were likely to do about as well as the S&P, on average. Over a three year period, from March 2000 to March 2003, the S&P lost about 30% of its value, not to recover the same levels until October 2007. That is seven years with no gains, not including inflation. At even a 1% inflation rate, you would have never recovered your losses before entering the 2008 recession.



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The Small Investor's Guide
New ideas for small investors