Smooth Investing When the Ride is Bumpy

0:04Matt Frankel:The stock market is getting bumpy, but we want to be smooth investors. This is Motley Fool Money.

0:21Matt Frankel:Welcome to Motley Fool Money with the Hidden Gems team. I'm Jon Quast and I'm joined today by our contributors Rachel Warren and Matt Frankel. We are really happy that we can start taking some questions from our mailbox on this show. It's a really great addition. It actually works out really well this week because we had to tape today's episode in advance. So if you are in the future listening to our voices and the world is falling apart, something is on fire and we're not talking about it, apologies. We're living in the past taping this and that's why we're not acknowledging it. But let's get to our question here.

0:55Matt Frankel:We're actually going to make an entire episode out of this. And here is the mailbag item that we pulled out. It's from a listener named Brandon O'Shaughnessy. And he writes, Dear Motley Fool Money Team, I'm writing to you today regarding the significant market volatility we are experiencing in 2026. Given the current sea of red and the fact that many investors are seeing their recent returns wiped out, would you be able to take 10 minutes on an upcoming segment to discuss why diversification and maintaining a long-term outlook are the keys to surviving this environment. Specifically, I would love to hear your insights on how investors can persevere through these downturns and whether you believe the Motley Fool's strategies can truly beat the market during times of such intense volatility.

1:43Matt Frankel:Thank you for your time and for all the great content you provide. Best regards, Brandon O'Shaughnessy. So, Rachel, Matt, I thought we might break this down piece by piece. So let's address the first part of what Brandon writes about. Let's talk about volatility. Rachel, what is stock market volatility? And from a broad market perspective, what should investors consider to be normal? Yeah, you know, when we talk about volatility, I think a lot of people think, oh, maybe a market crash is coming. But honestly, in the investing world, volatility, from a technical standpoint, it's really the speed and frequency of price changes, right?

2:16You sort of think of it like turbulence on a flight. It's the bumps that the market experiences as it's processing new information. This could be interest rate hikes. This could be geopolitical headlines. It could be a wide range of drivers. But it's really just the market trying to find a fair price for stocks in real time, or even more to the point how investors value those stocks at that specific point in time. Now, for a long-term investor, volatility is not the enemy. It's really the price of admission for those higher returns that stocks can offer over things like, savings accounts or bonds in the long term.

2:47But I think it is important to point out from a broad market perspective, normal in the market can actually look a lot bumpier and even more volatile, if you will, than most people realize. So historically, the S &P 500 experiences an average intra-year drawdown of about 14%, give or take. So that means that in a perfectly healthy year, it's completely standard to see the market drop even double digits at some point before recovering. We typically see a single digit, you know, around 5 % pullback every few months and even a 10 % correction roughly once every year or so. So understanding those benchmarks is really crucial because I think it really helps us as long-term investors stay the course when headlines start getting loud.

3:27And I think we're, you know, really seeing this play out in real time. Those numbers can obviously look scary on a screen, but obviously that's also the moments where long-term investment opportunities are created. To quote the great Warren Buffett loosely, a volatility isn't a threat to be feared, but a tool to be used for buying quality companies at a discount. So I do think it's important as investors to recognize that volatility is actually much more normal than it might feel like in that moment in the market.

3:52Matt Frankel:Yeah. And as you point out, I think it's so much easier to brace yourself for something when you know it's coming. But if you don't know it's coming, it can really catch you off guard. And so I think that is, to your point, Rachel, the first step in learning how to handle the stock market is understanding the normal ebbs and flows of the stock market. There's a lot that happens in a given year. Now, Matt, I want to turn to you here. I believe you've been investing longer than Rachel and I. And I was wondering if you just would speak to your personal experience in this area. If stock market volatility is normal, then certainly you've experienced that as an investor.

4:28Matt Frankel:and I'm curious, what is the worst period of volatility that you've gone through? And maybe if you can remember, how much was your portfolio, your personal portfolio of stocks? How big of a drawdown did it experience and how long did it take to recover?

4:42Jon Quast:You know, I'm definitely aging myself here. I bought my first stock in 2002, which was actually in recovering from a bear market at the time. And one thing I've learned in over two decades of investing is that there is no such thing as a normal market. There's no such thing as a normal correction, a normal market crash. You know, we might hear, you know, it's been 10 years since we've had a normal recession. Well, there is no normal recessions. They're all different. They're all different circumstances. You're impossible to see coming. But in my time, the 2008-2009 period was the worst. Thankfully, I was still pretty early in my investing lifetime and my portfolio was still relatively small.

5:16Jon Quast:Investing was just kind of a side hobby for me at that point. But from the 2007 peak before the financial crisis, my portfolio lost about 60 % by the time things finally bottomed in March 2009. And it's not like I was doing a bad job of investing. The S &P itself lost 55 % from peak to bottom in that time. It took my portfolio a couple of years to reach new highs. And that's with continually depositing money into it. But it's important to note that this was a period that was full of opportunities for patient investors to buy shares of top quality businesses. For example, I ended up buying shares of Bank of America in the years that followed, and I still own them, and they've produced a roughly 500 % return since then.

5:56Jon Quast:This is also when I started buying shares of Berkshire Hathaway, which I always add to when it's on sale. And now it's one of my largest investments. But having said that, I didn't have an opportunistic mindset while it was happening in 2008, 2009. The financial system in the U.S. was on the brink of collapse. It was a scary time, and I wasn't a seasoned investor. So it was scary. I totally understand. It's one thing to say that there are opportunities when the market's down. It's another thing to actually live through it when the market draws down by over 50%. But one thing that I got right was not panicking and selling when things were plunging.

6:32Jon Quast:That was my biggest saving grace during that time period.

6:34Matt Frankel:Matt, we do have show notes that we go off of, and I'm going to go off script here because I want to ask you something about what you just said. You talked about a couple of years till your portfolio regained its previous highs, but that was while you were still investing during the downturn. And I just wonder if you could theorize or guess, how long do you think it would have taken to regain highs if you hadn't been investing on the way down as well as on the way up?

7:00Jon Quast:My guess would be roughly 2013, somewhere in that neighborhood, especially if you weren't investing heavily back then. A lot of stocks, especially in the financial sector, didn't actually reverse course for a couple of years. Like Bank of America, I don't think bottomed until 2013. So a lot of the stocks that I was buying at a discount ended up going to even more of a discount before they started turning the corner. So even though, yes, I was putting more money in the market, I was investing actively during that time, it took a while until we really saw things turn around, especially in the financial sector.

7:28Matt Frankel:All right. So let's circle back to Brandon's question here. He's asking about stock market volatility. We've talked about that, the normal cycles. We've talked about how bad things can get. Matt's portfolio is saying down more than 50 % during the worst of it. In the context of 2026, how bad has it been so far this year? And how bad do you think it could get? Or do you think that we've already seen the worst of it? Matt, I want you to go first here.

7:56Jon Quast:I'm going to be perfectly clear here. I have absolutely no idea what the stock market will do for the rest of 2026. And I'll even go further. Anyone who tells you that they do is lying to you. But to answer the question, 2026 hasn't been that bad so far from most of the market in terms of the percentage drops. Volatility has certainly been elevated, and there are some areas of the market that have been absolutely hammered, like software businesses. It could absolutely get worse before it gets better. The Iran conflict could escalate, sending energy up even further, or even if it doesn't escalate but just drags on.

8:29Jon Quast:The second order effects of higher energy prices, like grocery inflation, because you know, you have to pay for gas to the trucks that deliver it, and a lot of other goods and services in the economy could get worse. My general outlook is that the stock market will almost certainly be higher five years from now. And my bold prediction is that the Iran conflict is going to be over within a month or so, and the market will rebound on that news. But I'm not sure I'd go so far as to bet on that happening.

8:55Matt Frankel:All right, Rachel, Matt admitted, yeah, we don't know the future with certainty. But do you agree or disagree here with Matt's outlook for the year? What do you think? Yeah, I mean, looking ahead, I do think there could be a bumpy road in the market for the near future. And so in that sense, I agree with Matt. And I'm not going to make any bold predictions about what happens in 2026. I do absolutely think that we could continue to see additional volatility and dips in the market. And, you know, something that Matt said earlier is really notable, this idea that every time is a little bit different.

9:24And that's true. But also when we look back at so many of these lengthy periods of volatility in the market, even bear markets, there's always been this sense of, oh, this has never happened before. There's never been a bear market from which the stocks have not recovered and outpaced their prior returns. So I'm not saying we're going to see one of those in 2026, but I do find history and the track record of the market to be very comforting in that way. I think five years from now, we're looking at a better and stronger market that we see now. And one final note, I think it's important to differentiate between the performance of the market and the performance of your underlying stocks, right?

9:57All of us have very different portfolio compositions and preferences and risk tolerances, and that really affects the returns that we're seeing individually. For myself, I'm staying focused on the stocks and sectors I know well and that I believe in as long-term anchors in my portfolio, and that's regardless of what the market does over the next 12 months.

10:14Matt Frankel:All right, so we have sat here and we've talked about volatility, but when we come back, we're going to talk about diversification and how it can help. You're listening to Motley Fool Money. What does leadership really look like?

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10:47Matt Frankel:Welcome back to Motley Fool Money with the Hidden Gems team. We are still talking about Brandon's question. And before we get into kind of the second part of his question here, Brandon mentioned that some investors are seeing their recent returns wiped out by the current volatility, and that's how he put it. My personal portfolio is actually up year to date. So I was wondering if we could speak to the downtrodden sectors of the market. What is doing well right now and what is doing poorly, a poor portfolio performance in 2026 or being wiped out so far in 2026, it would seem to imply a certain concentration in the harder hit areas.

11:24Matt Frankel:Do you agree? Yeah, I think that that's true. I mean, personally, I'll say like a lot of investors right now, my portfolio is very much in the red. I'm someone that invests quite extensively in tech among a range of other sectors. And of course, that has been a very affected sector and industry. I do think it's important to remember, you know, that feeling of seeing your portfolio down is painful. I would say I started taking my investing journey very seriously during those early days of the pandemic. So I have been through this before. Those sector shifts are often just a natural part of a long-term market cycle.

11:56It is really dependent on how you invest, the types of companies that you put cash into. I think what we are seeing right now is there is a bit of a rotation from where the market is maybe taking a breather from those high growth leaders of the last few years, whether it is, you know, software stocks or otherwise, to find value in more stable areas. Now, I want to say as a long-term investor, seeing your tech stocks, for example, under pressure, it doesn't necessarily mean the story's over, that it's time to sell everything. You know, we're obviously seeing a real lift of those so-called real economy sectors, right?

12:26Think consumer staples, healthcare, industrials, energy. Now, those are driven by long-term tailwinds, but this is also, I think, a really predictable response that we're seeing in the market right now and that tends to come up during these periods of macro and geopolitical uncertainty. I think that it's also important to note that in the long run, the market tends to reward companies that grow their profits and cash flow regardless of what sector they sit in. So that pressure on some of those industries right now, it's a test of patience for those of us who are long-term shareholders. My view is if the underlying businesses are still dominant and growing, the current dip can look like really a minor blip when you're thinking of it in the perspective of a 10-year chart or a longer investment horizon.

13:09Jon Quast:Yeah. So John, I'm glad that your portfolio is higher. And I know the people who are listening to this with just audio can't see me rolling my eyes a little bit right now. But that's certainly not the case for me. I mean, the S &P 500 is only down about 4 % for the year as we're recording this, but I'm down about 10 % for the year. I'm down about, I think, about roughly 13, 14 % from the highs of last year. And if you're in a similar situation, I really want to emphasize this. It doesn't mean you're doing anything wrong. It just means you're exposed to the parts of the market that have been hit hard.

13:38Jon Quast:Like Rachel mentioned, she's in a lot of tech stocks. I'm in a lot of financials, one of the worst performing sectors. For example, I don't think anyone would argue that the MAG7 isn't a top quality group of companies, but it's down by double digits this year. So if you have a MAG7 ETF, you're down by double digits. Obviously, energy is doing well. It's up 35 % year to date. Rachel kind of mentioned this, but utilities and consumer staples are both up nearly 10%. So pretty much the more defensive of your portfolio is, the better you are likely doing right now. But these are areas that one, they tend to underperform the market in good times.

14:10Jon Quast:And two, by positioning yourself for outsized returns over the long run, you have to be willing to accept some elevated volatility in times of uncertainty like we're in right now.

14:20Matt Frankel:Man, I feel called out by Matt here. My portfolio has indeed underperformed the market in the last couple of years, which were good times. and here I am. I might be up a little bit this year, but it's not by much. Let's keep going here. We've talked about volatility. Now we're kind of talking about what things are down, what things are doing well. I love Brandon's question here as we continue to just hammer down on this. It does appear that Brandon understands the Motley Fool investing philosophy by the way he words this question. We do believe in buying and holding dozens of stocks, which really bucks a narrative.

14:55Matt Frankel:There's a narrative out there among the investing community that concentration or buying just a few stocks is how you build wealth. And our philosophy says that we should be diversified, which is very counter-narrative. So Matt and Rachel, why is it a good thing to actually be diversified, especially as we're talking about the subject of volatility? Yeah, I think it's a fascinating point you make, this idea of how the idea of concentration builds wealth, that that's a narrative that captures the imagination. But honestly, it's usually, we hear stories like that. It spotlights that sort of one in a million investor who went all in on a single tech titan and struck gold.

15:31And the story can sort of lift our imaginations, right? But it really ignores the many portfolios that can be wiped out or were wiped out because they leveraged the hilt on a single company that maybe hit a scandal or there was a technological obsolescence or some other hurdle. I mean, in a market where volatility is the only constant, Heavy concentration is not a strategy for building wealth, and it can actually be a strategy for high stakes gambling, which is really not what we're about when we are concentrating on a long term investment strategy. The other thing is, you know, when your portfolio is too concentrated, you could have a bad earnings report or some other event in a sector that derails years of portfolio progress.

16:10And so by being diversified, you know, we're not just spreading out risk as investors, but we are giving ourselves ways to capitalize our portfolio growth across the entire economy to absorb the shocks of a changing market cycle without being forced into a panic sell situation. I think ultimately the goal here, right, is to stay in the market long enough for the power of compounding to do the heavy lifting. And that is really more likely and something that is easy for even the most inexperienced all the way to veteran retail investors to achieve when you have a well-diversified portfolio.

16:44Matt Frankel:You know, there was a investor who wasn't a huge fan, at least in his words, of diversification. That was Charlie Munger. Charlie Munger was a billionaire investor, Warren Buffett's right-hand man for many years. He used to say most diversification is de-worsification. And, you know, who are we to disagree with such a wonderful investor, such a clear thinker on the subject of investing? And Matt, I just want to, I know you're a big fan of Charlie Munger as well. Are we saying something different from Munger here? And if we are, how dare we?

17:16Jon Quast:Diversification, as Charlie Munger uses the term, is generally referring to the practice of owning stocks or sectors that you don't know well, simply to have some more variety in your portfolio. So, I mean, Buffett himself once said that, quote, diversification is protection from not knowing what you're doing. Buffett notably avoided technology and pharmaceuticals, just to name a couple examples. But on the other hand, Charlie Munger didn't necessarily mean that diversification meant that you shouldn't own a lot of stocks. I mean, since I've been following Berkshire, and it's been about 20 years now, as I mentioned earlier, the portfolio had generally had between 40 and 50 stocks in it at any given time.

17:53Jon Quast:But as we know, they weren't afraid of concentrating assets in the stocks that they had the highest conviction in. It wasn't that long ago where Apple was half of Berkshire's portfolio. Right now, five stocks make up more than half of Berkshire's stock portfolio, and that's after paring down the Apple and Bank of America stakes. But, I mean, Warren Buffett and Munger also opened starter positions and owned several stocks in each of their favorite sectors, like financials. Both of those are very foolish investing concepts that you can have without a sector-diverse portfolio.

18:23Matt Frankel:All right. So, man, we are really hammering this topic, but we are not done yet. After the break, our analysts are going to leave you with just a couple of stocks that you might want to think about as we talk about volatility and diversification. You're listening to Motley Fool Money.

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