Motley Fool Hidden Gems Investing - 2023 Investing Blueprint

Episode Date: January 2, 2023

It's the perfect time to review your financial plan for investing in 2023. (0:21) 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 (10:15) 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.  Looking for more investing ideas? Go to www.fool.com/report to get your free copy of our "5 Stocks Under $49" report. Host: Chris Hill Guests: Andy Cross, Robert Brokamp Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th 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. Hey, Chris. Thanks for having me. 2022 is officially behind us, the worst year for investors since 2008. Personally, and I said this on the show last week, I am cautiously optimistic about 2023. We'll get into some specific industries in a bit, but I am curious, what is your mindset right now at the start of this year? Well, I too, Chris, remain optimistic to be a long-term investor, especially coming off, not just one of the worst performing markets for stocks, but if you look at the bond market, you look at investors' general portfolios, the vaunted 60-40 so-called portfolios, 60% stocks, 40% bonds, maybe some closer to retirement may have more in the fixed income

space. That had one of the worst years ever. I mean, it was down. 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% for the past year. All the rest were basically down and down big. And of course, we know at the individual stock level. So, 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 16-17 times earnings. That normalization is a better indicator for long-term investing returns going forward, even though it's been a tough year to experience. So, 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 it's going to be a better 2023. And certainly, I'm not expecting a general across-the-sector kind of terrible performance like we generally saw in 2022. 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 picker's market. Is that something? I'm assuming that is something that gets you even more excited for investing, given your line of work. So, yes, that is true, Chris. So, we've always been stock pickers of the mouth. Well, of course, for the past 30 years, and we've invested in all kinds of markets, good markets and bad markets. And 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. So when our stocks perform the worst relative to the market, that's the next,

the four or five-year returns are that much better. And some of the better times to be an investor in multiple kinds of stocks. Now, of course, future past returns or no prediction of future returns doesn't have to be that case, but generally that's a good lesson for us to And that's also across the market. The better time, like I said before, is to be a forward-thinking investor is when the markets seem to be the worst. And 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 for the looking forward for returns. So, you feel this investor anxiety. And 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 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. You've seen this drastic change in the environment of what it means to be an investor and where I can get returns. Investors no longer can just throw money at a dartboard or buy any kind of index or

or even ETF and expect 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% 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 advantage in 2023 is because of this different environment, more normalized environment, trying to identify the best places to put money in 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. 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 towards? We tend not to take a big macro focus, of course. Again, I just explained how we like to

focus on 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 a 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 communications services industry for the past year, that's down more than 40%. The consumer discretionary is down about 40% 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.

So going forward, when I look at 2023, again, from a bottom-up perspective, I think there are places where you say, okay, maybe the market and the environment and the appetite for investing is no longer just in a broad ETF market cap kind of investing. And certainly there are ETFs. I think ETFs can be a great place to have capital. But looking at individual stocks and markets, 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 kind of environment we're looking at,

the stability of their dividends to support the stock price. Some of those yields, while not as high as the two-year Fed funds or the two-year Treasury bond, which I mentioned before, those yields tend to add stability to the stock price. I mean, the consumer staples sector sells at 21 times earnings. And that historically has always sold at a little bit higher multiple than the S&P 500 in general because of the stability of the earnings that come with that. So, I think there are parts of the market, technology certainly looks far cheaper than it did at 20 times earnings than it did at the beginning of the year, which got so expensive. So, 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 work 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 into 2023 for me, it's really thinking about the balance. You want to have as much as you can that balanced portfolio of 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% for the next year or two, and that's a different environment than we had two, three years ago.

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

My pleasure, Chris. Happy New Year to you. 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? Let's talk about why people are talking so much about bonds these days and that's because 2022 was the worst year for bonds in our lifetimes and it's all thanks to the federal reserve because when you raise rates the prices of existing bonds

go down so really bad year for bonds but because the prices went down bonds are trading at a discount and as the bonds get closer their maturity dates they will increase in price so not only do you have a sort of a guaranteed increase in price as long as the bond issuers still in business, but you have rates that are higher than they've been in really a decade. So, a pretty solid investment. So, should younger people have bonds? Well, I think a general rule of thumb here at The Fool is that you should have 5% to 10% of your portfolio out of stocks. And I think short to intermediate-term bonds could be a good place for that. Cash is a good place as well. And certainly, once you are within a decade of retirement and in retirement,

you should have a healthy dose of bonds. 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? 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. Now, 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 seven to 10 years or so. And 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 historic lows. Stocks were 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% or a bit higher, should actually be just 3.3%. 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, I would say, but fairly valued. So, Morningstar updated its report saying It's actually now about 3.8%, so closer to that 4%.

And they actually also provided some ideas on how you could even boost a withdrawal rate higher than that if you were willing to be a little bit more flexible withdrawals. So, the good news for both retirees and those of us who are still working is that we probably should expect more from cash bonds and stocks going forward, which means higher withdrawal rates for retirees, but also, ideally, our portfolios will recover from the bad year that we saw in 2022. Well, and probably worth pointing out that, you know, I can imagine someone listening and thinking, well, what are we even talking about here? You're talking about less than 1%. You're talking about a half percent, that sort of thing. But if you're doing it right,

and by 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. Right. I mean, if you retire with a portfolio of a million dollars, right, 4% is $40,000 a year. If the safe withdrawal rate is actually just 3.3%, you're down to $33,000 a year. So that's $7,000 difference in how much you could spend. And 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. Your age and my age, both those numbers start with a five, so let's focus on younger investors. Other than the stock market, other than bonds. What should younger investors be focused on this year? I think one of the big questions for this year will be whether there'll be a recession. The latest Wall Street Journal survey of economists found that the majority actually do expect there to be a recession, which will lead to a rise in the unemployment rate. But some sectors have already seen this. We've seen waves of layoffs in 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 number one 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. So how do you do that? Well, 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 want 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 bosses' 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 in 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. And 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 and not always by a stranger applying for a job. And the final thing I would just point out is, and 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, right? Your resume is both a chronicle of your accomplishments, but also your case for why a potential employer should choose you. And each year, should be getting stronger and more convincing. And so if you do this every year and your resume isn't changing, that means perhaps you're becoming professionally stagnant and you 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 more persuasive. Robert Brokamp, thanks so much for being here. My pleasure, Chris. As always, people on the program may have interests in the stocks they talk about, and The Model Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow.