Why I Love Investing in Consumer Staples

When it comes to products that people buy there are usually two types of classifications, the first being consumer discretionary, the second being consumer staples. Consumer discretionary are usually items most people see as a luxury, things that if you were to have a small amount of money, you wouldnt purchase. Think clothes, bags, purses ect when you think of consumer discretionary. However the second category is what I love to invest in the most, which is consumer staples. Consumer staples are things that people will always buy regardless of economic conditions. Food, drinks, toothpaste, deodorant , ect all fall into that category. So why do I invest a lot of my money into consumer staples?

Basically consumer staples stocks are almost always able to weather a storm when it comes down to economic conditions. There is the idea of price elasticity of demand which basically measures how much someone would stop buying a product if the price were to go up. Items like luxury clothes, have a high price elasticity, basically meaning that people react to price increases heavily, while consumer staples have a relatively low price elasticity of demand. We call them inelastic goods because even when prices go up people tend to still buy them.

So with companies like Walmart, Proctor and Gamble, Coca Cola, ect, people dont tend to stop buying their products if they hit hard times. People will usually cut their budgets in other places before they stop drinking their favorite soda. Brand loyalty plays a lot into this as well, because people who drink coke their entire lives are willing to pay a bit more for the name brand. You cant say the same for other types of goods which are discretionary. Even in 2008 when people lost their homes and a ton of money, they were still buying the products they needed for every day life. This is the key to consumer staples.

The room for growth might not be as big as say a technology stock, but consumer staples stocks are relatively dependable and very easy to project growth. Their price to earning ratios tend to be lower than the industry as a whole as well, which means that very rarely do people expect large growth in these industries. I think as a whole it might actually make them underestimate their potential. As long as the population continues to grow, consumer staples are going to keep growing as well. This isnt only in the US either because brands like Coke are world wide.

In the last 10 years the consumer staples category has performed beautifully because they werent as badly hurt in 08 and they grew with the bull market in the past 5 years. In addition they pay larger than normal dividends which can be reinvested and grow your holdings faster. I think that the market overall is a bit overvalued, but if there is a correction I expect consumer staples stocks to take a hit the least. I dont like individual stocks, but rather an ETF or an index fund. I like VDC from Vanguard, IYK from Ishares is also good but the expense ratio is higher so you have to watch out for that.

-Calaber24p