Let's talk protection.
Over the long term, 80% of the time markets provide rainbows and puppies, and 20% of the time they require us to seek shelter.
In the past 12 months, the stock market has had two decent pullbacks that drove up fear, which had the media dragging out every market prognosticator around the globe for comments. Although doom and gloom attract viewers, unfortunately, that generally doesn't help investors figure out what to do with their portfolios.
Looking backward over the past 100 years or so, the stock market suffers a 10%-plus correction on average once a year. Historically there is a bear market (a 20%-plus slide) about every three and a half years.
The stock market is generally attached at the hip to the economic cycle, and the cycle goes through booms and busts, despite the fact that central bankers around the globe think that they can smooth those cycles out and remove bubbles and crashes.
Investors and their financial advisers must have a lifeboat strategy written out and in advance of economic slowdowns so that they can rely less on emotion and more on rules, logic and history. When stocks are selling off aggressively, economies are in crisis and panic is in the air, its important to remember that extremes don't last very long no matter the circumstances.
Try not to panic sell at the wrong time. Getting out is easy, but getting back in is much more difficult for the average investor.
So investors must have a plan to survive the storm and another plan to take advantage of the opportunities created by that storm.
Let's look at the top 200 most relevant brands universe for companies that protected capital much better than the S&P 500 during some periods of high volatility and significant slides.
Here are three top brands to consider when it is time to protect capital. All three are in the Dynamic Alpha Brands Index.
Current dividend: About 2.4%
When people are happy, they chew gum, eat chocolate and drink. When they are depressed, they do even more of the same.
Hershey is a go-to for all things chocolate and confectionary. The company's brands include Almond Joy, Breathsavers, Brookside, Bubble Yum, Cadbury, Dagoba, Good and Plenty, Heath, Hershey's, Ice Breakers, Jolly Rancher, Kisses, Kit Kat, Lancaster, Payday, Reese's, Rolo, Scharffen Berger, Twizzlers, Whoppers and York.
The stock performed admirably during some difficult periods because of its high-quality brands, strong brand loyalty and its position as a consumer staple.
Current dividend: About 1.7%
Most pantries are filled by spice brands owned by McCormick. The company manufactures, markets and distributes spices, seasoning mixes, condiments, and other flavorful products to individuals and the food industry.
McCormick's brands include Club House, Lawry's, McCormick, Simply Asia, Stubb's and Thai Kitchen.
During good times and bad, we eat at home and season our food using McCormick brands. The company is another consumer staple.
Current dividend: About 0.90%
Whether people shop there or not, most have seen Ross Dress for Less stores near where they live. Ross Stores operates more than 1,250 discount stores across the United States.
When times are good, consumers shop more, and when times are bad, shoppers pinch pennies and shift to discount stores temporarily. The company has been increasing its store count rapidly and has performed quite well during difficult markets.
How did the stocks of these three top brands perform during difficult market periods?
As the chart below shows, from October 2000 to October 2001, after the technology bubble burst, Hershey was up 19.02%, McCormick rose 52% and Ross Stores soared 109%, compared with a drop of 26.6% for the S&P 500, via the SPDR S&P 500 exchange-traded fund.
Next, as the chart below shows, during the recession from April 2002 to March 2003, the stocks fell but held up better than the market. Hershey was down 4.27%, McCormick fell 8.81% and Ross Stores lost 9.13%, compared with a decline of 25.6% for the S&P 500, via the SPDR S&P 500 exchange-traded fund.
Finally, as the chart below shows, from October 2007 to March 10, 2009, during the financial crisis, Hershey fell 30%, McCormick slipped 14.94% and Ross Stores was actually up 16.4%, compared with a drop of 54.07% for the S&P 500, via the SPDR S&P 500 exchange-traded fund.
In addition, generally, when the economy slows, interest rates fall and bonds hold up well, and rate-sensitive bonds have done the best historically. So investors must own Treasuries or municipal bonds during large equity sell-offs and economic slowdowns, as they tend to perform best and protect capital better than credit-sensitive bonds such as high-yield, floating-rate and other corporate bonds.
Some good choices for that exposure are iShares Barclays 7-10 Year Treasury Bond Fund (IEF) - Get Report , iShares Barclays 20+ Year Treasury Bond (TLT) - Get Report , Market Vectors AMT-Free Interim Muni ETF (ITM) - Get Report and Vanguard Extended Duration Exchange-Traded Fund (EDV) - Get Report . Here is a look at how those performed from October 2007 to the bottom on March 9, 2009:
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.