The Motley Fool: Layoffs and stock prices

Q. Late last month, a video game company announced that it would lay off about 5% of its staff — some 670 people. I would have expected the stock to plunge on that news, but it didn’t move all that much. Why? — S.R., Tucson, Arizona

A. Layoffs are definitely bad news for employees, but they’re not necessarily bad for companies (though this stock has shed some value since you wrote).

Some layoffs occur when a company is in deep, intractable trouble, but others happen when a company reorganizes, aiming to cut costs and be more effective with fewer employees. Trimming fat can be helpful, but cut too much, and you might be cutting bone.

In general, the stock market’s reaction will depend on what investors think. If they believe the move will greatly help the company, they may bid up the shares. If they see the layoffs as a bad sign, many might sell their shares.

Q. I’m a new investor, and I want to start buying stocks. How should I invest so that my money is safe and grows? — F.T., New Canaan, Connecticut

A. Take some time to learn more about stock investing before jumping in, so that you enter the market with reasonable expectations. For starters, there will always be some risk with stocks. You can reduce it by diversifying, though. The simplest approach is just to keep adding money to one or more low-fee broad-market index funds, such as one that tracks the S&P 500, over a long period.

Understand, too, that the stock market will undergo mild or severe downturns every few years — but it has always recovered and gone on to new highs. You can learn a lot at Fool.com.

$1 Million May Not Be Enough

Many people are saving and investing for their retirements (as most of us should do), aiming to amass $1 million. But for lots of folks, that might not be enough.

That’s especially true for younger people, because by the time they retire, inflation will likely have shrunk the purchasing power of that million. If inflation averages 3% annually, it can cut your money’s purchasing power in half over 25 years. So the younger you are, the bigger the nest egg you should aim for.

However near you are to retirement, you might use the flawed-but-still-useful “4% rule” to get a rough idea of how big a nest egg you’ll want. The rule, simplified, suggests withdrawing 4% of your nest egg in your first year of retirement and then adjusting future withdrawals for inflation. So if you retire with $1 million, 4% would get you $40,000 that year. Add your Social Security benefit to that (the recent average retirement benefit is close to $23,000 annually), and any other income. Would that be a reasonable sum for you to live on?

It’s helpful to take some time estimating how much income you’ll need or want once you’ve retired. Start with your current living expenses and adjust them for retirement — will you spend less or more on dining out, for example? You might spend less on your wardrobe, but more on activities such as hobbies and travel. Be sure to factor in health care, which could cost you hundreds of thousands of dollars.

If it looks like you’re way behind in preparing for retirement, you might improve your situation by saving more aggressively and by working a few more years than you planned. That way you can invest more money, and your nest egg won’t have to support you for as many years. Generously funding retirement accounts such as 401(k)s and IRAs can also help.

For lots of retirement guidance, check out our “Rule Your Retirement” service at Fool.com/services.

A Keeper

My smartest investment move happened in the late 1990s. I inherited some money and bought a few stocks in increments of about $2,500 per stock. The best was Amazon.com. I bought 50 shares for a total cost of $2,632.53. I just held on, believing that the company would continue to do well. In 2022, the shares were split 20-for-1. I now have 1,000 shares, recently trading at about $175 per share (total value: $175,000).

I expect to continue to hold these shares; even though they make up a significant percentage of my portfolio, I don’t see much downside. Some of the others were net losers and are long gone, but this one was a keeper! — C.S., online

The Fool responds: Well done! Your story is a wonderful illustration of the power of hanging on to great performers through thick and thin for many years — if not decades — as long as they remain healthy and promising.

With Amazon shares making up a major portion of your portfolio, you have lots of eggs in one basket. If for some reason Amazon shares sink sharply (a not-impossible event), they’ll take much of your portfolio’s value with them. Think about how much risk you’re comfortable with, and consider selling some of those shares and reinvesting the money elsewhere.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)

Name That Company

I trace my roots back to 1990, when two men launched me with five stores in the Chicago area. I went public in 2007, and my stock has surged more than 1,700% since then. Today, based in Bolingbrook, Illinois, I’m America’s largest beauty retailer; I offer cosmetics, fragrance, skin care products, hair care products and salon services. My market value recently topped $26 billion, and my 1,350-plus stores span all 50 states. I rake in almost $11 billion annually and employ more than 45,000 people, the vast majority of whom are women. I’ve won multiple “best employer” awards. Who am I?

Last week’s trivia answer

I trace my roots back to 1957, when brothers launched a frozen food production facility in New Brunswick, Canada. Over the years I acquired businesses such as Kitchens of Sara Lee, CelaVita, Lutosa and Anchor Food Products, adding offerings such as frozen appetizers, egg rolls, ready-to-eat meals and desserts. Today, headquartered in Toronto, I produce about a quarter of all the world’s frozen french fries. (I’m capable of churning out more than a million pounds of potato products per hour.) I employ about 22,000 people on six continents and rake in more than 14 billion Canadian dollars annually. Who am I? (Answer: McCain Foods)

Learn Your Alphabet

Google parent company Alphabet (Nasdaq: GOOG) (Nasdaq: GOOGL) has grown to have a recent market value near $1.7 trillion — and it still has room to grow more. For starters, it dominates multiple markets: Google is the top search engine by far, YouTube is the top video-sharing platform, Chrome is the most widely used browser and Android has the biggest market share in mobile operating systems worldwide.

Alphabet is financially strong, having generated more than $307 billion in revenue in 2023, posting nearly $74 billion of that as profits. It can be hard for huge companies to grow briskly, but Alphabet has some promising newer businesses. As an example, its artificial intelligence technology can drive growth for its Google Cloud unit as the transition of IT spending to the cloud accelerates.

The best stocks to buy, arguably, are those that have “optionality” — multiple paths to growth. Alphabet has more optionality than most. The company is a pioneer in quantum computing, which has the potential to be a huge market. Its famous “other bets” segment includes biotech ventures, smart-home devices and more.

On top of all that, the stock is attractively priced at recent levels, with a forward-looking price-to-earnings (P/E) ratio of 20, below its five-year average of 24. Long-term investors should take a closer look. (Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and has recommended Alphabet.)