You may have come across the expression “cyclical industry” before, but what does it mean and how does it affect your investments?

Generally, the terms “cyclical” and “non-cyclical” categorize how closely a company’s share price follows economic fluctuations or cycles.

Cyclical companies closely follow economic ebbs and flows and depend on a strong economy, as people have more money to spend on luxuries when times are good. In periods of slower economic growth, non-cyclical equities usually outperform the markets. However, this also means that during an economic uptrend, non-cyclical stock prices tend not to skyrocket.

For simplicity’s sake, you can think of non-cyclical products as necessities and cyclical products as luxuries.

Another term for non-cyclical industries is “defensive stocks,” which are the types of companies that produce goods or services including the basic necessities of food and water, as well as household goods, health care and personal care products.

Food — We all need to eat, so grocery chains can be a hedge against an economic dip. However, restaurants (or restaurant chains) generally do not fare as well, because when we have less money to spend, we tend to stay home and cook more.

Utilities — The utility sector such as water and power is fairly insulated during economic downturns as it provides a necessary service. These companies typically grow conservatively as time passes.

Household Goods — If you look around your house, there are always certain staples such as soap, paper products, toothpaste or detergent that you use up quickly and need to replenish on a regular basis. While these household non-durable goods may not seem essential, you likely cannot live without them, and they are prime examples of non-cyclical industries.

Health care and Personal Care — Pharmaceuticals can be another sector that investors move into during market corrections. We will always need health care and personal care products such as over-the-counter cold remedies, headache medicine and vitamins, in addition to prescription drugs.

You may wish to consult your investment adviser to ensure that your diversification strategy takes these factors into consideration.

Janine Martin is an investment adviser with Odlum Brown Limited, Member CIPF. Her column appears Fridays.