Investor Education: Cash Is Best Defense In Slumps

What does one do when the stock market turns sour? Go defensive? We often hear: Get into tobacco and those household staples. That's what the big guys do.

Do you really buy that line? You shouldn't.

The stock market began its correction July 26. Since the broad market has such a strong impact on individual stocks, it just makes sense to avoid corrections and bears.

How best to do that? By moving to cash. Not by buying defensive stocks like Procter & Gamble (NYSE: - ), British American Tobacco (AMEX: - ), Pfizer (NYSE: - ) or Johnson & Johnson (NYSE: - ).

Look at Procter & Gamble. Even in bad times we have to buy house-cleaning products.

But Procter & Gamble hasn't seen a 20% quarterly profit rise in years. Sales gains have fallen to single digits in the past two quarters. It has an RS of 69.

Yes, the stock is up 4% since July 26. but it sank 48% in 2000's first quarter. Even these so-called "safe" stocks are not immune.

Where does this myth come from? In fact, while we have the choice of being in the stock market or not, some of the biggest guns don't.

Many mutual funds, with billions under management, simply must be in stocks. They have discretion over which stocks to buy, but they can't shift to bonds or cash in a big way.

These huge players gauge their performance against the indexes. If the S&P 500 falls 10% and they lose only 6.5%, they've had a good year.

Your gauge is much simpler: Did you make money?

Tobacco and food mega-cap -- and Dow member -- Altria (NYSE: - ) peaked July 9 at 72.20 (point 1). The market's tremors pushed it to 63.13 by July 30, a 13% drop (point 2). Now It's clawed back to 70.54 (point 3).

Not awful, but if you thought this tobacco-stained blue-chip would protect you from market forces, you were wrong.