Playing Defense Within Your Portfolio

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As the debt ceiling debate rages on, many investors are worried about their portfolios. Personally, I've been worried since the sharp rally of 2009. I've certainly enjoyed the great ride from the lows, but I'm not entirely convinced that we're going to have sustained growth until we work through our housing inventory, high unemployment, and high federal and state debt levels.

While it sounds great to wait until things are better to invest, that will likely be too late. The stock market trades on expectations, with companies' stock prices moving wildly because they exceed or miss analysts' estimates. By the time an investor waits until things have truly gotten better, there will already have been others who forecast that outcome and bid stock prices up.

What's an investor to do? On one hand, things are as uncertain as they can be. On the other hand, it's hard to stay entirely in cash and watch the stock market go up, if the economy continues its slow upward ascent.

Winning either way
With that in mind, I currently favor defensive companies. Earlier this month, I wrote about companies in the beverage, health-care, and household products spaces. These are great places to be in uncertain climates, since people tend to consume beverages, receive medical treatment, and buy diapers and toilet paper no matter the economic outlook.

Several days after writing about those companies, I took the plunge and bought shares of Clorox (NYS: CLX) , Procter & Gamble (NYS: PG) and Colgate-Palmolive (NYS: CL) . While soda, beer, and tobacco companies are every bit as stable as these, I gravitate toward personal-care and cleaning products at the end of the day.

If the economy turns sour, my companies will continue to see stable sales as people continue to shave, change diapers, and use all-purpose cleaners. I feel a lot safer than if I'd bought a basket of homebuilders. Conversely, if the economy doesn't falter and starts an upward trajectory, I still benefit because a stronger economy means stronger GDP growth all around.

My personal aim with a portion of my cash was to build a basket of consumer staples companies that manage to perform strongly in good times and in bad. This basket will serve to smooth out the fluctuations of my more volatile holdings. Given the uncertain economic climate, I don't think it's a bad idea to add defensive holdings such as these to one's portfolio.

Foolish bottom line
Looking forward, I have other similar companies on my radar. Consumer products leader Unilever (NYS: UL) and Kimberly-Clark (NYS: KMB) , maker of Huggies diapers, are near the top of the list. Whether I initiate a new position or add to a current holding will depend on which company offers the best reward-to-risk ratio. Whatever company I choose, I know that consumers all over the world will be using the company's products every day.

At the time this article was published Paul Chiowns shares of Clorox, Colgate-Palmolive, and Procter & Gamble. The Motley Fool owns shares of Clorox.Motley Fool newsletter serviceshave recommended buying shares of Clorox, Unilever, Kimberly-Clark, and Procter & Gamble. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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