Investing Defensively Can Lose You a Fortune

I bet you may have heard a lot about investing defensively while the market faded.  I understand how that may come off as sound advice.  But I just want to remind investors that you don’t HAVE to own stocks or even mutual funds during a down turn.  And the only real way to avoid losing money in a down turn is to be short stocks or not own them (or shift into other assets).  Take a look at this fairly busy chart from Bloomberg that shows how various stocks and financial assets performed during the 2008 downturn.

Pretty, isn’t it?  Actually it is pretty ugly.  Starting in December of 2007, the S&P 500 (SPY) was down a whopping 54% (yellow line) 16 months later when it bottomed in March 2009.  The Nasdaq (QQQ) actually fared better during the time frame down only 48% (red line).  Oil (USO) clearly did the worst down 60% in the time frame (blue line).  The only thing that did well was Gold (GLD) up 18% during the time (orange line).  So when people encourage you to buy gold to be defensive, that may actually work.  But what about the “defensive” equities?

Coca-Cola -38% (KO)

Clorox -28% (CLX)

P&G -38% (PG)

Look, I have no idea if we are headed into a real downturn (economically) or not, just don’t listen to people telling you to shift your portfolio to defensive names.  No one get rich losing 30-40% on names like this.  Either sit it out, learn to short, or buy some gold.  But remember advice you hear is often to help hedge funds and mutual funds “outperform”.  But in a real downturn, you won’t feel better outperforming if you lose 20% less than everyone else, because you will still lose.