Stock Investing Strategies 2023

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In this podcast, Motley Fool Chief Investment Officer Andy Cross discusses:

  • His optimism after the worst year for investors since 2008.
  • The potential for 2023 to be “a stock picker’s market.”
  • Why financials and healthcare are two of the industries he’s watching for opportunities.

Motley Fool personal finance expert Robert Brokamp weighs in on whether all investors should more seriously consider bonds, why retirees might be able to increase their safe withdrawal rates, and the biggest asset younger investors have this year. 

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This video was recorded on Jan. 2, 2022. 

Chris Hill: If you’re looking to start 2023 with a plan for investing, you’re in the right place. Motley Fool Money starts now. I’m Chris Hill. Joining me today, Motley Fool’s Chief Investment Officer, Andy Cross. Andy, thanks for being here.

Andy Cross: Hey Chris, thanks for having me.

Chris Hill: 2022 is officially behind us, the worst year for investors since 2008. Personally, and I said this on the show last week, I’m cautiously optimistic about 2023. We’ll get into some specific industries in a bit, but I’m curious, what is your mindset right now at the start of this year?

Andy Cross: Well, I too, Chris, remain optimistic to be a long-term investor, especially coming off, not just one of the worst-performing market for stocks. But if you look at the bond market, you look at investors’ general portfolios, the vaunted 60-40 so-called portfolio, 60 percent stocks, 40 percent bonds, maybe some closer to retirement may have more in the fixed income space. That had one of the worst years ever. It’s down somewhere in the high teens going into the end of the year. So it’s just a really tough year for investors. Only really one bright spot in the S&P 500 sector, which was energy, which is up more than 50 percent for the past year. All the rest were basically down, and down big. Of course we know at the individual stock level.

Investors are feeling this volatility and tumultuous time to start the year and we’ve seen both interest rates move up and we’ve seen stock multiples for the most part move down. When stock multiples are moving down for long-term investors, that tends to be a better time to be an investor. If you look at the S&P 500, the multiple has gone from more than 21 times the beginning of 2022 to now around 16 to 17 times earnings, and that normalization is a better indicator for long-term investing returns going forward, even though it’s been a tough year to experience. Going into the year while we still have, I think, expected volatility, I think that’s going to be a bright spot or an opportunity for stock pickers versus just passive index investors. I think that’s going to be a better 2023 and certainly I’m not expecting a general across the sector terrible performance like we generally saw in 2022.

Chris Hill: You just touched on something that I’ve heard more of over the past few weeks. This idea that with optimism going into 2023, the optimism is less across-the-board rising tide, lifting all boats, and more along the lines of this is going to be a stock pickers’ market. I’m assuming that is something that gets you even more excited for investing given your line of work.

Andy Cross: Yes, that is true, Chris. We’ve always been stock pickers of The Motley Fool, of course, for the past 30 years, and we’ve invested in all kinds of markets, good markets and bad markets. Historically, if you look at our own data from Stock Advisor and Rule Breakers, generally the best time to be an investor and our performance is best during the worst times of the market. When our stocks perform the worst relative to the market, that’s the four- or five-year returns are that much better and some of the better times to be an investor in Motley Fool stocks. Now of course, past returns are no prediction of future returns. Doesn’t have to be the case, but generally that’s a good lesson for us to learn and that’s also across the market. The better time, like I said before, is to be a forward-thinking investor when the markets seem to be the worst.

If you look at like the American Association of Individual Investors, their sentiment index, it’s still in a bearish territory, so generally it’s more balanced and now it’s been in the bearish territory looking forward for returns. You feel this investor anxiety. I think for those of us who are looking at individual positions and trying to use our cash positions, have a balanced portfolio across different industries, trying to find the highest-quality positions, you’re going to have opportunities going into 2023 that are pretty attractive for future five-year and longer returns for those investors who have the stomach to manage the volatility. Chris, if you just think about what happened with interest rates in 2022, the two-year interest rate, the Treasury interest rate was less than one at the beginning of 2022. It’s now more than 4.3 going into that year. So you’ve seen this drastic change in the environment of what it means to be an investor in where I can get returns.

Investors no longer can just throw money at a dartboard or buy any index or any ETF and expect it to generate good positive returns, I don’t think. Now generally the market, as we know, tends to march higher over five-, 10-year periods. There’s no 20-year period going back over history that the S&P 500 has not made money. Every five years, close to 90 percent of the time the stocks make money, so you generate a positive return. It’s better than not to continue to have money in the markets. I think where we might have an advantage in 2023 is because of this different environment, more normalized environment. Trying to identify the best places to put money at an individual stocks is going to serve us well looking over the past five years because the trend is not necessarily just that the easy money is out there and looking for places to invest and you can invest in anywhere. You have to be a little particular in 2023, I think, and that’s going to serve stock pickers well.

Chris Hill: Later in the week on the show, we’re going to be talking about specific categories of stock investing, dividend stocks, growth stocks, value stocks. Today, I’d love to get your thoughts on industries. At the start of the year, there have to be industries that are looking more attractive as a group than others. When you look out across the stock market, what industries do you find your eyes gravitating toward?

Andy Cross: We tend not to take a big macro focus, of course. Again, I just explained how we’d like to focus on an individual positions, and we still do. So we don’t take a big general macro perspective on sectors per se. I think certainly there are people on our team who use that as a guide, and I think it’s interesting to look at which sectors look more attractive on an earnings or sales basis when you compare their earnings and their growth prospects to their prices in the market and the past returns. If you look at something like the communication services industry for the past year, that’s down more than 40 percent. The consumer discretionary is down about 40 percent for the past year. You’re seeing these big drawdowns in the stocks, and I mentioned energy is about the only sector in the S&P 500 that is positive, and positive by a large margin.

Going forward, when I look at 2023, again, from a bottoms-up perspective, I think there are places where you say, OK, maybe the market, and the environment, and the appetite for investing is no longer just in a broad ETF market cap investing. Certainly there are ETFs. I think ETFs can be a great place to have capital, but looking at individual stocks in markets like financials in the S&P 500 selling at 12 times earnings, healthcare selling at 17 times earnings. When you look at the S&P 500 selling about 16 to 17 times forward earnings. Those parts of the market look more attractive than they might have in the past, considering what’s going to happen with interest rates, the environment we’re looking at, the stability of their dividends to support the stock price.

Some of those yields, well, not as high as like the two-year fed funds rate or the two-year Treasury bond, which I mentioned before, those yields tend to add stability to the stock price. The consumer staples sector sells at 21 times earnings. That historically has always sold it a little bit higher multiple than the S&P 500 in general because of the stability of the earnings that come with that. I think there are parts of the market technology, certainly it looks far cheaper than it did at 20 times earnings than it did at the beginning of the year, it has got so expensive.

I think those parts of the market that is recognizing the kind of landscape that we’re in, financials, healthcare, that’s where I’m hunting for some of the opportunities to put capital that especially in the Motley Fool style of investing, maybe investors are a little bit more under-allocated to when they think about their allocation percentage. I think that’s really going in 2023 for me, it’s really thinking about the balance. You want to have as much as you can, that balanced portfolio, thinking about how you’re allocating capital, looking ahead for the best-positioned companies to be able to operate in an environment of a fed funds rate that is probably going to be 4 to 5 percent for the next year or two, and that’s a different environment than we had two, three years ago.

Chris Hill: Andy Cross, always great talking to you. Thanks for being here.

Andy Cross: Thanks, Chris. 

Chris Hill: Now that we’ve spent time on the stock market, let’s talk about some other parts of your financial life you may want to be thinking about as you build your plan for the year. Robert Brokamp is a Certified Financial Planner and The Motley Fool’s resident expert on retirement planning and he joins me now. Robert, thanks for being here.

Robert Brokamp: My pleasure, Chris. Happy New Year to you.

Chris Hill: Happy New Year. I want to start with bonds in part because I really cannot recall a time in the past 10 to 15 years when there was this much talk about bonds. Their relative attractiveness as an investment because to me, bonds have always been for people who are at or very close to retirement age. I am wondering though if younger investors, when they’re making their plan for 2023, should bonds be something they’re considering?

Robert Brokamp: Let’s talk about why people are talking so much about bonds these days. That just because 2022 was the worst year for bonds in our lifetimes. It’s all thanks to the Federal Reserve because when you raise rates, the prices of existing bonds go down. Really bad year for bonds. But because the prices went down, bonds are trading at a discount. As the bonds get closer to their maturity dates, they will increase in price. Not only do you have a guaranteed increase in price as long as the bond issuer is still in business, but you have rates that are higher than they’ve been in really a decade. A pretty solid investment. Should younger people have bonds? I think a general rule of thumb here at the Fool is that you should have 5 to 10 percent of your portfolio out of stocks. I think short- to intermediate-term bonds could be a good place for that. Cash is a good place as well. Certainly, once you are within a decade of retirement and in retirement you should have a healthy dose of bonds.

Chris Hill: Let’s come back to younger investors in a minute. But for older investors, for retirees, what does the current landscape tell you about safe withdrawal rates?

Robert Brokamp: Generally, the news is getting better and that is because the prospective returns, the future returns for stocks, bonds, and cash are more attractive than they’ve been in the last few years. We don’t really know what the stock market will do over the next year or two. But actually, valuations provide a good hint as to what we could expect over the next 7 to 10 years or so. Then when it comes to cash and bonds, you just look at interest rates and that tells you where returns will go. If you go back to 2020 and 2021, rates were at historical lows, stocks are pretty expensive. That meant the safe withdrawal rate that a retiree could take out of their portfolio was really pretty low. In fact, Morningstar issued a report last year saying the safe withdrawal rate, which most people think of as 4 percent or a bit higher, should actually be just 3.3 percent.

It created a bit of controversy with the report. But the bottom line is they were probably right for retirees to play it safer a year or two ago. Now though, looking forward, rates are higher, stocks are cheaper, not cheap, but I would say, but fairly valued. Morningstar updated its report saying it’s actually now about 3.8 percent, so closer to that 4 percent. They actually also provided some ideas on how you could even boost withdrawal rate higher than that if you’re willing to be a little bit more flexible withdrawals. The good news for both retirees and those of us we’re still working is that we probably should expect more from cash, bonds, and stocks going forward, which means higher withdraw rates for retirees, but also ideally, our portfolios will recover from the bad year that we saw in 2022.

Chris Hill: Probably worth pointing out that I can imagine someone listening and thinking, what are we even talking about here? You’re talking about less than 1 percent, you’re talking about a half percent, that thing. But if you’re doing it right and buy it, I’m referring to investing. If you’ve been investing for decades, ideally, you’ve built up a nest egg to the point where half a percent translates into thousands, if not tens of thousands of dollars.

Robert Brokamp: If you retire with a portfolio of a million dollars, 4 percent is $40,000 a year. If safe withdrawal rate is actually just 3.3 percent, you’re down to $33,000 a year. That’s $7,000 difference in how much you could spend. This is a very safe withdrawal rate, I should add. Many people will say it should be a little bit higher than that, but regardless of however you choose your safe withdrawal rate, the fact that interest rates are higher and stocks are cheaper is good news.

Chris Hill: Your age and my age, both those numbers start with a five. Let’s focus on younger investors. Other than the stock market, other than bonds, what should younger investors be focused on this year?

Robert Brokamp: I think one of the big questions for this year will be whether there’ll be a recession. The latest Wall Street Journal‘s survey of economists found that the majority actually do expect there to be recession, which will lead to a rise in the unemployment rate. But some sectors have already seen this. We’ve seen ways of layoffs and tech real estate businesses related to mortgages. If you’re younger or even if you’re still working and have a while until you retire, the No. 1 risk of recession to your finances is job loss, which means now is a good time to be shoring up your human capital. That is your ability to earn a safe, diversified, and growing paycheck. How do you do that? You start by researching the trends in your profession and industry.

You want to see where the good jobs are, but also what’s the risk to your profession and maybe to your own company as well. You wanted to become essential to the revenue. Most companies have more than one source of income, but not all of those revenue streams are equal. You want to determine your company’s essential sources of income and become an integral player in those, you want to make a difference and document the ways you add value. Look for ways to grow the business, improve processes, or just make your colleagues and boss’ lives better and easier. Of course, you want to maintain networks, but not just external networks, but internal networks.

That’s particularly important nowadays because many of us are not in the office anymore. You have to really put an effort to get to know other people in your company or just within your sector, your industry. That means setting up Zoom coffees, lunch dates, things like that. You’ll learn aspects of the business beyond your immediate responsibilities, help you identify new opportunities within the company, maybe other ways you can add value. Then of course, you want to network externally as well because the fact of the matter is open positions are often filled by someone who knew someone, not always by a stranger applying for a job.

The final thing I would just point out is that it’s something I think is a good idea whenever you’re thinking about your new year’s resolutions, is to update your resume every year. Your resume is both a chronicle of your accomplishments, but also your case for why a potential employers should choose you. Each year it should be getting stronger and more convincing. If you do this every year and your resume isn’t changing, that means that perhaps you’re becoming professionally stagnant and you’ve got to think about ways that you could enhance your human capital, grow your skills, maybe get important designations or degrees, and find other ways to make your case for persuasive.

Chris Hill: Robert Brokamp, thanks so much for being here.

Robert Brokamp: My pleasure, Chris. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against so don’t buy or sell stocks based solely on what you hear. Chris Hill, thanks for listening. We’ll see you tomorrow.