Should Investors Think Defensively in a Volatile Stock Market?

Stock market volatility has clearly picked up recently, and many investors understandably are considering how they can play defense with their portfolios. However, in this Fool Live video clip, recorded on Dec. 6, Fool.com contributor Danny Vena takes a closer look to determine if that’s really a smart idea.

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Danny Vena: I had a couple of charts that I wanted to share, and primarily this is because when you talk about a downturn, you want to think in broader terms than what is the stock going to do today? Or what is the stock going to do over the next, whether it’s weeks or months or however long your recession lasts? I’m going to go ahead and share my screen here for a minute and show, now this chart shows from the beginning of the last recession till when the S&P 500 got back to breakeven. From the period of November 2007 to the period of February 2013, was how long it took for the S&P 500 to get back to breakeven.

Of all of the stocks that we talked about and unfortunately, Shopify (NYSE: SHOP) is not going to show on this list because it wasn’t a public company until 2015. But you will see that every one of these companies that we talked about outperformed the S&P 500 from the high until the S&P 500 got back to break-even. This group of companies is fabulous at performing ahead of the market in a downturn. But I’m going to do you one better. I’m going to change my screen here.

I’m going to show you one more chart. This chart is going to be from the bottom of the recession until now, and here’s that screen. Let’s see what happened if people bought all of the stocks on this list and how those stocks did. If you look at it, and for some reason I failed to put the S&P 500 on here, but I will correct that now. But if you look at all of these stocks, the S&P 500 is up remarkably. The two stocks that didn’t perform as well for the whole period are the two that we ranked highest [out of eight “recession resistant” stocks], which is Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) and Walmart (NYSE: WMT).

Consistent performers, the best place to put money during a recession. But during normal economic times, which is most of the time, every one of these stocks outperformed. I think this is a case that Matt made earlier, which is buy all eight of these stocks, put them away, come back in 10 years, and you have a portfolio that has crushed the returns of the broader market.

Danny Vena owns Shopify and has the following options: long January 2023 $1,140 calls on Shopify and long January 2023 $1,160 calls on Shopify. Matthew Frankel, CFP® owns Berkshire Hathaway (B shares). The Motley Fool owns and recommends Berkshire Hathaway (B shares) and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify, long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $1,160 calls on Shopify, short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.