How to Be Opportunistic in a Down Market

In this podcast, Motley Fool analyst Tim Beyers and Motley Fool personal finance expert Robert Brokamp offer some mindset insight and historical perspective. They discuss how you can be opportunistic in a down market, and how to think about your cash position.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Feb. 5, 2022.

Tim Beyers: I’ve tried to make this point, Bro, even if you don’t dollar-cost average every month, if what you do is buy a little bit at a time, you’re still going to get ownership in businesses at different price points and gathering a whole bunch of different price points, it’s a little bit like eating vegetables. It’s just good for you.

Chris Hill: I’m Chris Hill, and that was Motley Fool senior analyst Tim Beyers. If your portfolio is like mine, over the past few weeks, you’ve probably seen some red and felt some pain. Today, Tim talks with Robert Brokamp, certified financial planner and The Motley Fool’s resident retirement expert. They offer some tips on mindset, some questions to consider before you hit the sell button, and they discuss ways to be opportunistic in a down market.

Tim Beyers: I welcome Fools, we’re going to talk some market volatility here. I’m Tim Beyers, here with me is Robert Brokamp. Bro, how are you feeling? Is market volatility getting to you?

Robert Brokamp: Every once in a while, it absolutely is. It’s a mixed bag really. On the one hand, no one likes to see their net worth drop. On the other hand, if you are in a situation where you have some cash on the side or you’re in the accumulation stage of your life, you are buying stocks at cheaper prices. It really depends on where you are along the road to retirement.

Tim Beyers: Put a pin in that for a second, because I think that’s a really important point knowing where you are and what your goals are is particularly important. But let’s just assess as we start out here, where we are at this moment. The market has been incredibly volatile. As we’re taping here is a few days before when this podcast recording drops. You may be hearing this over the weekend, and we were recording on Monday. But we’ve seen a lot of days where the market started up or started down and then just completely reversed, and it wouldn’t surprise me at all, if that’s happening again. This roller-coaster volatility, I think that’s the part that may be new for investors who’ve been around for a while, and if you’re a new investor and have never seen this before, this is normal-ish. [laughs] We’ve seen a lot of drawdowns over the course of time, a lot of bear markets, but things seem to be moving much faster these days, Robert. If we put these in some perspective, stocks are moving up and down maybe at 10-20% moves in the matter of days and sometimes hours, versus in years past that might be weeks or months. Do you think that’s fair to say?

Robert Brokamp: Yeah, I would think so, and especially if you are a newer investor and you’re investing in certain companies that have gone down considerably more than the market. As we speak now, S&P 500 down maybe almost 10% for the year, Nasdaq and S&P 600, which is small-cap stocks, down, maybe closer to 12-14%. But there, something like one-third of the stocks are down by 30-40%. Again, it’s really just happened for many of these stocks in the last month and it can be very shocking if you’re not used to it.

Tim Beyers: Right. Let’s address the elephant in the room. Most of those stocks, they are stocks recommended by Motley Fool services full stop, and we know that. We know that that is what’s happening here to a lot of members, and particularly new members. We have new members who’ve come in and we’ve seen this story a lot. It’s heartbreaking, Bro. Because we have somebody who comes in and they’ve taken our recommendations and then suddenly they have multiple stocks, maybe the majority of stocks, their portfolio are down, somewhere to 30-50%. If that’s you, this podcast is aimed at helping you navigate this right now. Because the instinct you may have in this moment is to say, “This is a bad environment, this was a mistake, and I need to get out.” We’re going to talk about why and a little bit why it may not be a good time to get out. That pain is real, Bro. Somebody sees that on their brokerage statement, they see that much red. They go to CNBC, or they go to our site, they go to Yahoo! Finance, and they see that much red, it causes real emotional pain. Maybe this isn’t everybody, I’ll just only speak to it from my perspective. But I think when you start to see that red, Robert, the first thing that happens is you start to reevaluate, I don’t know if I’m going to get to do what I want to do. For example, am I going to have to delay retirement? That’s a real thought that happens, right?

Robert Brokamp: Yeah, absolutely. Ultimately, that’s why we’re investing. We’re not investing so that we can see bigger numbers on our brokerage accounts, we’re investing because we want to pay for something in the future. For most people that’s retirement, could be college savings, could be a second home, but we all have goals. It just feels very difficult when you think you’re at a certain pace to reach that goal and then after a month or two or three, you now seem farther behind. I would say the pain is real, and I think it’s important to know that we’re right there with you. Many of the stocks that you own that are down 30, 40, 50%, we own as well. Now having the benefit of being a long-term investor, I joined the Fool in 1999, I was a financial advisor for a few years before that, so I’ve been through this. I can just tell you that the pain is real, it hurts now, but if you stick it out, you’ll be happy that you did.

Tim Beyers: Yeah. Well, let’s talk about some of the historical data there, because I joined as a contractor back in 2003, and so I’ve been through multiple market down cycles, including investing through the great financial crisis. You and I both invested through the dot-com and then subsequent dot-bomb periods. If you’ve been at this for a while, you know that every market drawdown is different. What we were talking about just a couple of minutes ago is what seems to make this market drawdown different, is it’s even faster than what we’ve seen previously. In other words, the drawdown acceleration is going even faster than it usually goes. David Gardner has made this statement before, and it’s a great one. In talking about markets, he says, “The market always goes down faster than it goes up, but it goes up more than it goes down.” This is a slightly different market drawdown in that it’s happening faster, but market drawdowns are still market drawdowns. Let’s talk about some stats, some things we know about market drawdowns, beginning with the most important one, I think. The market goes down once every three years, but on average, two out of every three years the market is up, right?

Robert Brokamp: Right, exactly. I’ll drop back all the way back to 1928, and I’m going to use some stats.

Tim Beyers: Okay, sure.

Robert Brokamp: Stats from Ben Carlson of Ritholtz Wealth Management in that, you have to expect that roughly two-thirds of the year is that the market is going to go down 10%, just in the course of the year; and you can expect 20% declines about a quarter of the years, and then you have 10% of the years you can expect drawdowns of 30-40%. You have to expect that these types of things happen. I think what feels different about now is these stocks that were the darlings of 2020 and even the beginning of 2021, have seen significant drops that probably a lot of people aren’t used to.

Tim Beyers: We have members who want to know, have we seen this before? A 30, 40, 50% decline from a high, and then that stock has come back. The answer is yes, we’ve seen that a lot, and it’s not just with Netflix and Amazon, which are the most often cited ones. Like Intuitive Surgical, MongoDB, drawn down over 30% several times on the way to multibagger returns. Back in 2006, David wrote a piece for, literally the headline was, “Meet the World’s Worst Investor.” That felt a little tricky if you were to click into be like, “Who could this person be?” David was profiling himself. What he was talking about is during that time, right around 2005, 2006, the Nasdaq in the space of a very short period of time was down 12%, and many of the stocks in Rule Breakers were bleeding red. I believe at that time, Intuitive Surgical, in fact was down 50-60%, just getting absolutely murdered. He wrote in that article, he said, “I wish my stocks were down 12%.” It was that bad. The reason I bring this up is because it’s not just the headline stocks that we’ve talked about like Netflix and Amazon. This was so bad at one time in Motley Fool Rule Breakers that the entire scorecard was negative, and some of the major winners that you know if you are in that service were down just absolutely massively. David said, “You could call me the world’s worst investor right now.” Now of course, we know with the benefit of hindsight that David is far from the world’s worst. He’s arguably one of the world’s greatest [laughs] investors. We know that he’s definitely not one of the world’s worst investors, but this is part of the math that comes up. Bro, I wonder if there’s a stock that you have stuck with over the course of years that you saw get absolutely trashed, that has since come back for you and been a real winner.

Robert Brokamp: Yeah. The stock I would choose is Starbucks, and I own it. I think it’s a great example because everyone knows it, and everyone looks back and probably thinks, “Well, of course, that was a sure winner.” Everyone loves Starbucks stock, but that actually wasn’t the case. It hit almost $20 in 2006, and then basically it began a three-year slide to almost $4, and it didn’t get back to $20 till around 2011. That was basically five years of being flat for a company that is used by everyone and beloved by most. Of course, nowadays, now it’s almost $100 per share. You’ll find many other great stocks that spent a long time essentially being flat to down. Microsoft, I think is another great example.

Tim Beyers: Sure.

Robert Brokamp: It hit its dot-com peak actually in 1999, so before the rest of the tech stocks. It fell and it did not exceed its 1999 peak until 2016.

Tim Beyers: Yeah, and with extreme valuations. There’s a legitimate question there that I do want to address because we have some people who are saying you’re recommending stocks at all-time highs. They’re never coming back to those levels. They look back to that time of 1999 and the dot-com euphoria, and they say that’s the period we’ve been in. Now, the reckoning is coming, and you just recommended all of these growth stocks at generational high valuations, and they’re never coming back. The answer to that is, that may be true in some cases, that is absolutely possible. I’ll also say, just to validate, what some folks have said here. That, if a stock is down like, 80% or 90%, there is a chance that it is not coming back. That is absolutely possible. I’m not going to dismiss the legitimate concerns that people have. What can you do in those sorts of situations? We’ve said for a long time, and if you haven’t heard us say this, that’s on us. I’m going to say it now, so that you can maybe put some framing around this. I would love for you to add to this, Robert. We want you to be a net buyer of stocks in all markets, including when they’re at generational highs. Now, that does not mean we want you to go all-in and say, OK, I pick my spots. The Motley Fool said this is a great buy. I’m going all-in on the 52-week high. We never want you doing that ever. What we really do like, is if you’re a net buyer of stocks on a regular basis.

Robert Brokamp: I’ll pick up on one thing you said, and that I think it is important to remember that there are some stocks that won’t come back. Often people will say when we’ve talked about Amazon or Netflix.

Tim Beyers: We’re cherry-picking.

Robert Brokamp: There’s a survival bias, the survival basis.

Tim Beyers: Exactly.

Robert Brokamp: My favorite example is GE. You and I, growing up, thought of GE as the bluest chip of all the blue chips.

Tim Beyers: Sure.

Robert Brokamp: It peaked in 2000. It’s still almost 80% below its all-time high. If you would have told someone in the ’90s that GE would provide that type of return, they wouldn’t have believed you. There are some times that will happen, which is why it’s fundamental that you own at least 25 stocks. Me personally, I think, you should own even more, at least until you become so experienced and successful as an investor that you can handle a more concentrated portfolio. To get to your point about the mathematics of dollar-cost averaging, I’m not going to give the math itself, but basically, it is this. You want to be a net buyer of companies. You want to be an accumulator of companies, as you are working through your career and getting to that point, where you will have to turn some of those companies into cash. I’m 15 years from retirement. I’m thinking of all the 401(k) contributions I’m going to be making over the next several years, and that if the market goes down and stays down for a while, that just means I am going to be buying more companies at cheaper prices.

Tim Beyers: Sure.

Robert Brokamp: There are many examples of people who have done the same thing at past peaks. Whether it was the dot-com crash or even further back to when you go back to 1987 when the Dow dropped 20% in one day. If someone just started investing on that day, the very peak, but then continually made additional investments along the way. That person would be a multimillionaire. Because even though you get to that peak, once it comes down, you’re just buying companies at cheaper prices along the way. By the way, if you’re reinvesting your dividends, it’s the same thing, which is why Jeremy Siegel, the professor at Wharton, has called dividend reinvestment the recovery accelerator because it’s automatically doing some dollar-cost averaging for you where the cash is just buying more shares of the companies, which then produce more dividends, which buy more shares of the companies and so on.

Tim Beyers: It’s great advice. I’ve tried to make this point, Bro. Even if you don’t dollar-cost average every month, if what you do is buy a little bit at a time, you’re still going to get ownership in businesses at different price points. Gathering a whole bunch of different price points is a little bit like eating vegetables. It’s just good for you, and it allows you to buy at a high. I’ll give a good example here. There’s a portfolio that I run, where the stock has just gotten absolutely crushed. As part of that overall position, the stock I’m talking about here is Fastly. We bought some back when it was down, at lows it hasn’t even reached yet. We got an initial position in there, and then we added more. Then, at one point, we added some more money, and it was at a high that it felt like a stretch. It was close to, I think, $130 a share. We had some members that bought there. My message, at the time, was, be slow, be careful. Do not go all-in. We’re adding a little bit because we believe in the company, but we’re not doing a doubling-down or anything like that. The net position is still up, but that’s only because we have several different price points. We added to it across several different price points.

You can add to your stocks. It doesn’t have to be every single month, but you add to them a little bit at a time. It’s OK to dip your toe in the water, and then a little bit more, then a little bit more, and then a little bit more. Before we wrap here, Bro, a couple of things. There’s a couple of stories I want to tell here, and then we want to give some very specific takeaways to remind folks of what we’ve been saying here and distill them into a couple of very practical things they can do. Two stories, quickly. The first is the biggest investing mistake I ever made. That, if you hear us, and we sometimes hear this, Robert. I don’t know if you’ve ever had a similar mistake like this. As The Motley Fool, we’re Motley, but one of the things that’s fairly common across the investors on the team, is we’re reluctant to sell. This story, I’m going to tell you, is one of the reasons why. It’s because it’s more costly, in my experience, to sell badly than it is to buy badly. It’s more costly to sell badly than it is to buy badly. Here is my story along these lines, Bro. I’ve told this too many times before, and it still hurts. I still hate it.

But it was 1999. I bought my initial shares of Amazon. It was about $1,000 worth of stock. Because Jeff Bezos, who’s on the cover of Time magazine, Time‘s Person of the Year. By 2002, the stock had fallen to $7 a share, and I dumped it. You don’t have to do very much math to know that selling at $7 a share was a catastrophic mistake. There is a practical impact here. Our older son had a first choice of college that we could have used those funds, if I had stuck with it and not sold it, to probably pay at least a couple of years of tuition at this really good school. But I was not patient, and I sold out of that. I’ll pause there for a second. You don’t have to top my story, Bro, but if you’ve got one, I’ll take it. [laughs]

Robert Brokamp: Well, I will say this, I hardly ever sell. There are stocks that I wish I did sell because there are stocks that are not going to do well. I’m sure, Tim, in your history, there are times when you have sold the stock, and you were right to sell that stock. But the thing is what we believe, and we have demonstrated in our history at The Motley Fool is that, holding on to a great company will do so well that it overwhelms the bad picks. Motley Fool history is full of bad picks, but our record is so good. It’s because we hold onto these ones that do so well. They make up for all the losses. I will tell you how I manage things. I don’t sell. Like I said, there are some, I probably should have. But I basically follow a general of having 10% of cash on the side. It’s a pretty standard guideline from Motley Fool services. Assuming you have a pretty high risk tolerance, and you’re more than a decade from whatever goal you have. Like I said, I’m 15 years from retirement.

When that drops to about 5% because my stocks have done so well, I will do things like, maybe not reinvest my dividends, let them accumulate in cash. Maybe put a portion of my 401(k) contributions in cash, so that I build up that cash hoard. So that then when I feel like there are good opportunities, I will buy more. If I ever get to a point where my cash is 15% because the stock market has come down, that’s what I really go all in. I would say anyone who is more than 10 to 15 years from retirement or when they need the money, history says you’re going to be fine in the stock market. Stocks have made money in about 94% of 10-year holding periods in almost all 15-year holding periods. Now we know many people listening are not in that situation. They’re closer to or in retirement and it definitely makes sense. Once you are 10-15 years and you’re maybe a little bit more conservative or moderate risk tolerance to do a little bit less of that. But history shows that if you’ve got that timeframe, you’re probably going to be OK.

Tim Beyers: Let’s boil down some last bits of advice here and I’m going to tailor this a little bit because you made a good point here, Robert, that we have a lot of members, the ones who are hurting the most right now are older — 60s, 70s, maybe some in their 80s. We saw some people just in the last couple of weeks who are just really upset. That pain resonates. I really hate it because I’ve heard from some people like, “Think I might have to delay my retirement or scale back what I thought I needed to do.” That’s real. I want to give one piece of advice here to start with, Bro, and then I’d love for you to react to this. This is something that I’m doing that I think is reasonable. If you are in an older age bracket and you’re in retirement, you’re like “what do I do now.” The No. 1 thing that I would do in your shoes is make sure I had five years of cash set aside for my retirement needs. If there’s other capital after living expenses and savings, then maybe I can think about doing some other investing. But I really want to have those five years settled because what we know from our research is that crazy markets tend to at least settle a little bit if you give it a five-year period. What’s your thought on that and anything you want to add there.

Robert Brokamp: I’m totally with you. I say it’s important when it comes to investment to be short-term pessimist and a long-term optimist. Historically, when you look back at the ’20s, bear markets on average take three years to go down and come back up again, but many have taken longer, in fact the first two bear markets of this century took almost five years to recover so that’s why we have that principle of any money you need in the next three to five years and if you retired five years, you should have that out of the stock market. These days, really cash is probably your best bet. Even the bond market is down so far this year because of interest rates going up so just keep it in cash, you’re not going to get much of a return, but it’s an investment. But then the long-term optimist part is appreciating even if you are retired.

Most financial planners recommend that you plan on living to age 95 and some are bumping that up to 100 because people are living longer. That means you may need if you’re retired, just to use the old 4% rule, you’ll need 4% of your portfolio this year. But there’s the majority of your portfolio that you won’t need for five years, 10 years, 20 years, maybe even 30 years, depending on your age. Over that long of a timeframe, you almost have to have that invested in stocks, or a good part of it invested in stocks. Because you need your portfolio to last as long as you do, and you need the purchasing power of your portfolio to keep up. If you instead invest in cash or bonds, it’s just not going to do it. I’ve looked at many studies of safe withdrawal rates in retirement and the recommended allocation is somewhere between 40% stocks and as high as 75% stocks because you need that growth to make sure that your portfolio last for decades and it’s able to buy things in the future at higher future prices.

Tim Beyers: Then the last thing we can say then, this is a little bit of a fuzzy and it’s going to feel a little froufrou here but it is important. This is the time to be working on your mindset. What I mean by that is, if you come at this with a lot of anxiety and what am I going to do? Take it from somebody who really struggles with this. I have a long history with catastrophizing anxiety. I have my own clinical mental health issues. I know this very, very well. I know in this environment, it’s very easy to get to “oh no, what do I do now” and that is a natural response. The easiest way to find your way out of that is getting that five-year setup. Once you get that five-year setup, then you can go from fear “oh no, what do I do now” to “oh, what can I do now?” Which is different. That’s a very different approach. What we hope is that as you ride this out a little bit and you take stock of your portfolio and try first not to sell. If you can help it, if you do need to, then be strategic and get that five years. But then see what other capital you can add. Be a net buyer on a regular basis if you can do it. But piling into your interest if you can’t be regular, just be a net opportunistic buyer of stocks a little bit at a time and think about it just like you would any other habit you’re trying to build. You just try to do something every day and get a little bit better and a little bit better and a little bit better, and ultimately it adds up to a lot. Enough of me yammering. [laughs] Any last words of wisdom here before we have to go.

Robert Brokamp: I’ll return to something we talked about toward the beginning and that is you’re investing for a reason and that reason might be retirement, but it could be something else. I think it is really important to line up whatever the value of your portfolio is with what your goal is and to see if it’s enough. That involves either using a few really good online calculators or maybe even seeing a fee-only financial planner. Or you could pay by the hour or the project, just say, am I on track or not? Because it might be even though your stocks are down, you still have enough money and you’re fine. Or it might be you know what, because of this, you are going to be behind so either you have to adjust your expectations or find more ways to get money into your 401(k)s and your IRAs and your college savings accounts. Because it’s important to check that there’s those signposts along the way. You want to know, am I on track or not? That’s ultimately what everyone to know, am I on track? Figure that out now and then figure out what you have to do if you’re not. Because then you’ll be much happier 3, 5, 10 years down the road knowing that you took action today to get yourself back on the right direction.

Tim Beyers: You tell me if I have this right. There are generally two types of financial planners. There are financial planners who get paid by selling you products. We don’t recommend those folks. We do recommend financial planners who make their money by charging you a fee and they have no interest whatsoever in what financial products you use. They just get paid by the hour or by the project to work entirely for you and no one else. Did I get that right?

Robert Brokamp: Yes. You got that right and now you can find fee-only planners, there are a few networks to try. The Garrett Planning Network, there’s NAPFA, National Association of Personal Financial Advisors, and the XY Planning Network. Some of them will require that they manage your money, charge you 1% to manage your assets, but many of them will charge just by the hour if that’s what you want. If you would say listen, “All I want is a professional opinion to make sure I’m on track.” You should be able to find someone who can help you with that.

Tim Beyers: Yeah, the final product of that, will be they’ll take a look at all of your assets. They will literally write out a plan and say, here it is, this is what you’ve shown me, here’s what I see and that can be helpful too in these situations. We are buying stocks alongside you, it’s hard, but we will walk with you. If I could leave you with that, there’s a lot of us who are buying. I’m buying more. There’s a lot of other members of the team that I know are buying more right now. Services are buying more right now. If I could leave you with that encouragement, the way that we’re reacting to this is trying to find ways to buy more. We hope that you too will be a net buyer of stocks. That’s it. Thanks for joining me, Bro, and we’ll see you soon, Fools. Fool on.

Chris Hill: That’s all for today, be coming up tomorrow, Jason Moser and Matt Frankel with a deep dive on 5G and the ripple effects for banking, gaming, and more. 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. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Chris Hill owns Amazon, Microsoft, and Starbucks. Robert Brokamp, CFP(R) has no position in any of the stocks mentioned. Tim Beyers owns Amazon, Fastly, MongoDB, and Netflix. The Motley Fool owns and recommends Amazon, Fastly, Intuitive Surgical, Microsoft, MongoDB, Netflix, and Starbucks. The Motley Fool recommends the following options: short April 2022 $100 calls on Starbucks. The Motley Fool has a disclosure policy.

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