Is It Time to Play Defense in the Stock Market?

Should investors try to time the market and take out cash when prices get frothy? Or should shareholders ignore volatility and stay in the market? In this episode of "Beat and Raise," Motley Fool contributors  Brian Withers, Taylor Carmichael and Lou Whiteman discuss their investing philosophies. This segment was recorded on Sept 2.

Brian Withers: So we talked a little bit about the market hitting all-time highs today. If you look at the graph, just when the coronavirus hit the market tanked considerably, but it's been up and down a little bit every day. But the big trend from mid March of 2020, it's all been up and to the right, and the market high prior to that was February 2019, but we've blown past that and gone even higher. With stocks at market highs, the market continuing to go up, how are you guys thinking about your portfolio today? Are you pulling cash out of the market? Are you moving to defensive stocks? What are you doing? Taylor, why don't you to take this one first?

Taylor Carmichael: Okay. It's interesting to think about. I was thinking what constitutes the market? Amazon (AMZN 3.45%) is a big chunk of the market. The internet companies in particular have been really strong and most of my portfolio is that light asset business, so they've done incredibly well. I do think there are still some industries that haven't fully recovered. You think of hotels, you think of cruise lines, there are sectors that are still way down. That reopening that I thought was going to happen still has not fully happened. There's definitely sectors that have not fully recovered yet from the coronavirus. That's a big thing to think about is are we going to correct from the coronavirus, are we going to vaccinate everybody, is it going to go away?

Then the other issue is with the Fed and keeping interest rates low. When you talked about the S&P being so amazing and the market being so amazing over the last 10 years it's because the Fed has kept interest rates very, very low and that might be starting to change as we have inflation coming in. We're seeing a lot of inflation coming in recently over the last many months I think. That's one thing that I changed in my portfolio is a major switch I made, we went from Visa (V -0.32%) to Schwab (SCHW 0.17%). It was a defensive move that I did because I don't know when, but at some point, I think interest rates are going to have to go up to combat inflation. I don't think it's going to happen until we defeat the COVID-19. It's a weird thing but I think the Fed is keeping it low because of COVID-19 and there's still a recession going on for a lot of businesses.

But a lot of internet stocks, Amazon, a lot of different companies are doing great. They're doing as great as they ever are, so it's a weird bifurcation. I'm not taking money out of the market, though. I'm investing, I'm putting cash into the market. I'm buying the same stocks I've already bought and doing really well. But I do think we're going to have a strange shift in a year or two when we got to move past COVID. At some point, if inflation keeps going, we're going to have to raise interest rates and that's going to change the market dynamic.

Brian Withers: We've been through that before too and some of that uncertainty is priced into the market already. I love your approach is keep on, keeping on, and looking at great quality, high growth companies, and continuing to buy as you just continue to add to your portfolio. Lou, I love this. I love your approach.

Lou Whiteman: Basically, if the question is am I my changing anything up because of where we are? The answer is no. Life is complicated as it is. I don't have enough free time. I certainly don't have the time to watch CNBC every day and get yelled at. I don't know when it's coming. I don't change what I do based on where we are. I'm not smart enough to know where we are. I put aside five years worth of everything I can think of, anything I have left over goes into the market.

The nature of the companies may change, it goes into whatever companies I'm most interested. Sometimes there's good solid logic behind that, sometimes it's based on valuations and where the market is. What I might think of macro, sometimes it's based on I think the logo is cool. Whatever it is, but that is whether or not we're at an all-time high, an all-time low, I don't have the time or the bandwidth to figure out where it goes from here, so I try steady as it go.

Brian Withers: I think I'm with you too, Lou, because I was very impacted personally by the 2008-2009 crisis, the financial crisis. I was laid off right at the same time the market hit its bottom in March of 2009. I had to sell great companies at ridiculous prices to raise some cash for an emergency fund. If I had it done like you, Lou, had five years of cash on the side, wow, I wouldn't have sold Starbucks (SBUX 0.46%), I wouldn't have sold Nvidia (NVDA 6.17%), Intuitive Surgical (ISRG 0.61%). Those are just a few of the companies that I sold in early 2009. Netflix who have since gone on to be fantastic winners. As we got out of the coronavirus, I got my job, I watched the market from 2009 continually up in 2011 and when we got to 2011, I'm thinking like the market is today.

The market's at all-time highs. I think we're around the corner for pullback and I've been waiting for a major pullback like 2008, 2009 for the last decade, and it hasn't happened. Luckily, I've ignored my inner worry and just continued to invest in the market because I like being invested in market. I love the companies that I've invested in, regardless of what happens overall. That's why we buy great companies because they will do well regardless of how the market is over the long-term.

Lou Whiteman: The one thing I'd add just because despite my flip answer, I do mean that though. But I do think that we are more than likely headed for something sometime in maybe not near term, but I do think at some point in the next few years, we are going to see pressure on equities and I am a bit worried it is going to be more like 2008-2009 that it was last year. There's a lot of new investors in the last decade I fear might say, well, I got through the three months of COVID without selling, so I can handle this. I don't think that's a reason to adjust your portfolio. I think it's a reason to watch Tim and Asit over a mindset.

Brian Withers: There you go.

Lou Whiteman: Going into this year, I've basically been wrong. But we did a year prediction show and I suggest now is the time to steal yourself or to really have that tough conversation with yourself. I still feel that way. I'm not going to change my investments from it but we're far enough into the cycle that it's time to at least have the conversation with yourself and get yourself ready so you don't sell if it goes down, because it may not bounce back in three months this time.

Brian Withers: In 2009 when I was selling stuff, I was like, this is horribly the worst time to be selling, and I shouldn't be selling, and I was stuck. I had gotten myself into that position because I didn't have an emergency fund, and I didn't have the safety valves that I should've had and it hurt.