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Investment lessons learnt during stock market volatility · On The Money

• 0:03
  Kyle Caldwell: Hello, and welcome to on the money, a weekly look how to get the best out of your savings and investments. If you regularly listen to the podcast, you may have noticed that I've been away the last couple of weeks, but I have been keeping a close eye on the markets and how Donald Trump's tariffs are keeping investors on tenterhooks. It's great to be back, and I thought that given we've not covered on the podcast the recent stock market volatility that we should dedicate an episode to it. But given there has been a lot of coverage already on why the sell off has occurred, I wanted to instead mainly focus this episode on what what we can learn from the sell off and indeed what we can learn from other stock market sell offs that have taken place for our history. I've also crunched some performance numbers to assess how different types of funds have fared during the sell off.
• 0:57
  Joining me for this episode is Craig Rickman, personal finance editor at Interact Investor. For those that didn't see it, Craig, alongside three other internal experts at Interact Investor, participated in a webinar before the Easter bank holiday weekends that answered questions from customers about the stock market sell off. I'll put a link to that webinar in the description of this week's episodes. Craig, for those that didn't tune in, could you give a flavor of the sorts of questions the customers were asking about the sell off?
• 1:31
  Craig Rickman: Indeed, I can. So, yeah, there was a really interesting mix of questions. So someone asked for advice other than not to panic. One asked, I get that markets have recovered from downturns in the past, but is this one different? Someone else asked, is a multi asset fund all the diversification I need to protect myself through this period of volatility?
• 1:51
  Another asked, how can investors nearing retirement protect their portfolios during economic uncertainty? So, yeah, a real, mixture of questions that captured what investors were thinking and feeling at the time.
• 2:04
  Kyle Caldwell: And one of the key messages in answering those questions is the importance of keeping a cool head and not panicking. When stock markets become more volatile as they have been, it's important to take the long term view rather than make any rash decisions that you may later regret. Of course, a loss is only a loss when you sell. Until then, it's a paper loss, and there is the prospect of recovery. Now at the worst point, which was on the April 8, the S and P five hundred index had lost 20% of its value from its earlier all time high, which was achieved on the February 19.
• 2:45
  And when a stock market index falls 20% or more, that is called a bear market. Meanwhile, the technology Nasdaq index, it lost at its worst point nearly a quarter of its value from its pre Christmas peak. Now since then, both the S and P five hundred and the Nasdaq index, they've been making a partial recovery on the back of Donald Trump pressing the pause button on tariffs for ninety days except, of course, for China. Oh, Craig, I think it's also important to stress that while it is unnerving to see your investments fall in value, depending on where you are on your investment journey, stock market sell offs can actually turn out to be great buying opportunities due to the fact that share prices fall and valuations also fall at the same time.
• 3:35
  Craig Rickman: So, yeah, absolutely. And I think that the big thing there is where you are in your investment journey. So, you know, whether falling markets pose an opportunity or a threat largely depends on whether you're still in the process of accumulating wealth or you're taking an income from it or close to taking an income from it. So, yeah, I mean, if if you're still saving for retirement, for example, and you've got sort of many years on your side, if markets drop, you can buy shares at cheaper prices that when markets then recover at some point, which, history tells us they do, can deliver a meaningful boost to your portfolio. But in contrast, if you're fast approaching retirement or are already drawing an income, volatile stock markets can be a bit of a worry as you may have less scope to ride out the ups and the downs.
• 4:20
  That's one side to it. The other side is if you're in cashing shares in falling markets, then that can affect how quickly your money grows when the rebound does arrive. So it very much depends on where you are in your investment journey.
• 4:35
  Kyle Caldwell: And at times such as these when there is heightened levels of stock market volatility, I think it really tests your mentality as an investor. And if you meant if you are concerned that you may panic sell when stock markets fall on bad news, then it may be more suited to you to consider drip feeding money into the market rather than investing a lump sum. So if you have a regular plan, say, for instance, you invest at the start of every month, that goes away with the risk that you may put all of your cash into the market just before a nasty dip. And so this strategy benefits from something that's known as pound cost averaging. So when stock markets fall, the regular investment purchases more shares or or fund units.
• 5:25
  Conversely, when stock markets rise, fewer shares and fewer fund units are bought. Having said that, data does show that while there's no guarantees, of course, you could get your stock market time and terribly wrong, that if you do put lump sums into the market at the right time when the market then goes on to have a buoyant period, then that does tend to beat regular investing. Now while stock markets do look fragile in the short term due to the uncertainty over the unpredictability of Donald Trump's policies, which, as many column issues have already been written, stating that they could prove to be inflationary and harm both US and global economic growth. It is when stock markets sell off that investors are offered the opportunity to try and buy low, provided the willing, of course, to accept the risk that things could get worse before they get better. Now however you invest, whether you invest lump sums or you have a regular investment plan, it's important to stay disciplined and focus on your long term goals.
• 6:32
  Times such as these, I think comfort can be drawn from the history books, which show the stock markets do tend to recover from sharp falls. So data from funds firm Mirabaud Group shows that historically, it has taken the S and P five hundred index an average of nineteen months to recover from a fall of 20% or more. And I've also seen separate data from fund firm Schroders that points to the fact that the global stock market falls 20% once every four years on average, and it falls 10% in most years. That may surprise you, but those are the statistics that show that the stock market does fall more often than you may think. As Schroders notes, the simple reality is that the stock market has tremendous power to help grow wealth in the long run, but short term volatility and risk of falls are the price of the entry ticket.
• 7:30
  And the data that Schroders based that on was the MSCI World Index, and it looked over the last fifty three years, and it found the 10% falls happened in 30 of those fifty three years. Whereas for falls of 20% or more, that happened in thirteen of those years. I think that quote from Schroders is great because it reinforces the fact that at times of stock market turbulence, you've gotta remember that volatility is part of the course of investing, and it is the price that investors pay for the fact that over the long run, putting your money in the stock market and invest investing it tends to deliver greater rewards than leaving it in cash. Craig, another investment fundamental which really comes to fore when stock markets have a tricky period is the importance of being diversified, which is something we've spoken a lot about on this podcast over the years. And diversification, of course, involves owning a mixture of different asset classes and different fund types.
• 8:28
  Craig Rickman: Yeah. I mean, yeah, diversification is a drum that's repeatedly beaten by journalists, investment experts, financial advisers. But I think as you say, you only really notice it's worth when things take a turn for the worst even if it's a temporary blip. So, yeah, the idea here is that you spread your portfolio across different asset classes, like shares, bonds, maybe commodities as well, gold. I mean, we know how well that's done recently, but also across different regions and sectors around the world.
• 9:01
  And the idea is that if one area is struggling and underperforming, others are there to support them. So it's it's really a a way of spreading your risk. The familiar saying, don't put all your eggs in in one basket. If you were to drop one basket and the egg smash, you've still got other baskets and other eggs.
• 9:18
  Kyle Caldwell: As you mentioned, Craig, we do talk a lot about the importance of diversification. So I thought, let's see how well diversified funds have performed during this period of stock market volatility. So I took a look at how funds fared since US stock market started their descent, which was on the February 19. And I ran the data from that date to the April 24, and the figures are from FE Analytics. So over that period, firstly, wanted to look at US funds.
• 9:51
  So the average US funds is down 16.2%. Now US funds that are focused on US smaller companies, they fared worse. They're down on average 20.3%, which is slightly higher than the average loss for technology funds, which are down 20.1%, and the average global fund is down 12.3%. Now let's have a look at funds that are more diversified than the funds I've just mentioned that invest in a single equity area or theme in the case of technology. So multi asset funds, which invest in both shares and bonds, you'd expect them to be better equipped to weather a market storm versus the equity funds that invest globally or in one particular region.
• 10:36
  So there are investment association mixed investment sectors, which are multi asset funds. So we looked at the two lower risk ones. So firstly, the investment association mixed investments north to 35% share sector. Over that period, the average fund is down 2.3%. Now moving up the risk level a notch, multi asset funds with a bit more in in equities or plenty in bonds still.
• 11:01
  They've also limited losses. So the average funds in the investment association mixed investments, 20 to 60% share sector is down 3.9%. Now another renowned investment strategy is the sixty forty portfolio. So this is having 60% in shares and 40% in bonds. If you look over the past couple of decades, this has really saved investors well apart from in 2021 when interest rates rose significantly, which caused both shares and bonds to fall in tandem.
• 11:32
  Now over this particular sell off, a fund that follows this approach is the Vanguard Life Strategy sixty percent equity funds. And over that time period, it's down 5.6%. I think overall, multi asset funds, they've held up very well during this sell off, and the data proves that. Now I also looked at performance numbers for a small number of wealth preservation investment trusts that prioritize protecting investor capital. So, therefore, when there is a stock market sell off, you'd expect these trusts to keep losses to a minimum.
• 12:07
  We've written many articles about these wealth preservation investment trust over the years, and I've spoken a lot about them on various podcast episodes. So the three main ones are capital gearing, personal assets, and rougher investment company. So they all have a low weighting to equities, and they have lots of defensive assets such as low risk inflation linked bonds and some exposure to gold. Now over this period, one of them actually made a small gain of naught point 7%, and that is the rougher investment company. And both capital gearing and personal assets held up very well too.
• 12:42
  They limited losses to naught point 9% and naught point 7%. There are, of course, other options for investors looking for defensive exposure in a portfolio, such as money market funds or goals or in these, a fund that offers broader commodity exposure. But, Craig, in terms of risk and tolerance for risk, which I know you write a lot about, it is a personal decision. Now, Craig, you were, in a former life, a financial planner, so I think it'd be really useful for you to briefly talk through what people should be thinking about when they're trying to grasp risk versus rewards when making their own investment decisions?
• 13:23
  Craig Rickman: Yeah. I think there are there are two aspects to risk versus rewards and risk tolerance. The first is what you like as a person or what your approach to risk is as a person. Are you someone who's typically cautious by nature? Are you somebody who's sort of happy to take big risks?
• 13:38
  Are you somewhere in the middle? So that's the first bit to understand. The second bit is when to deviate from that level of risk for specific investment decisions. So when I would sit down with clients, we would go through there would be a risk profiling process, which would involve quite a lot of conversation, also an electronic questionnaire. The electronic questionnaire would sort of kick out a risk profile that it thought was suitable for that individual, and that would generally be bunched into certain levels.
• 14:08
  So it could be you're a you're somebody who takes very low risks, low to medium, medium, medium high, and high. So that's one side of it. But then with specific investment decisions, sometimes it can make sense to to deviate from that. So I think a good one is is saving for retirement. So talking to some younger investors, they would often very much describe themselves as as lower risk or more cautious, and the questionnaire would support that.
• 14:33
  But then when it comes to retirement savings, if you've got sort of decades on your side, taking a belt and braces approach to investing can cause you a lot of harm. You've got plenty of time for your money to grow, plenty of time for your money to ride out the ups and downs. And so in that instance, it can make sense to take more risk than what you would naturally be comfortable with. So I think that's the really important thing to understand. And then, I guess, on the other side of that, you can have someone who sort of sees himself as a bit of a risk taker.
• 15:00
  But if their investment time frame is is short, so they may need the money in a couple of years' time, I don't know, for example, to pay for school fees, then they may take or or want to take a more cautious approach and and so look at safer investments as a result. So I think that's it. That's that's the two things. It's understanding, firstly, what you like as a person and then thinking about the risk and reward for specific investment conditions and time frame is quite a big factor there.
• 15:27
  Kyle Caldwell: And, of course, there's lots of articles that have been written on how risky is investing and how to define investment risk. For me, it all boils down to the fact that risk is the permanent loss of capital. And when and a time such as these when you see the value of your investments fall, it is scary, of course. But if you take the long term view, you're giving your investments the best opportunity to recover because you've given them time. I wanted to end by pointing out the if you look back at all the major setbacks for stock markets in recent times, such as the financial crash, European debt crisis, Russian invasion of Ukraine, COVID nineteen pandemic, stock markets recovered from all of those crises.
• 16:13
  Now, of course, we don't know the length of time it'll take markets to recover from Trump's tariffs. I'm not mystic Meg, but if I was gonna make my best guess, I would say that I do think it's gonna take longer than it took stock markets to recover from the COVID nineteen pandemic. Stock markets, they're always looking for a catalyst. And with the COVID nineteen pandemic, when the vaccines were announced, that gave the stock markets the catalyst to recover. Whereas this time, I think there's a lot of uncertainty over the tariffs and what the policies will look like and how governments across the globe will respond to the tariffs, how they'll retaliate with their own countermeasures.
• 16:54
  I just think there's a lot more uncertainty over the shape and form the tariffs will take. And, of course, the tariffs, they're here to stay. So I do think it'll be a more prolonged period of stock market volatility. However, my view is that if you're a long term investor, there's no reason to panic or panic sell. However, I do think now is a good opportunity following this sell off to do a spring cleaning of portfolio, examine how the portfolio has performed over the past couple of months and indeed over the long term, And think about whether you've got enough of a defensive buffer to withstand a further sell off or, indeed, a sell off in the future that occurs for a completely different reason.
• 17:37
  If you own both global and US funds, I'll take a good look at them. Take a good look under the bonnet of the underlying holdings to check that they are sufficiently different from one another. Given the fact that The US stock market accounts for around 70% of the global stock market, if you own, say, an S and P five hundred index fund or ETF and you also own a global index fund or ETF, then you're gonna be gaining a lot of the same exposure, particularly given that the biggest holdings in both The US and global markets are those US technology giants, the so called magnificent seven. To avoid potentially doubling up on the same exposure, you could look to maybe own an index fund alongside an actively managed fund that doesn't have that much exposure to the magnificent seven stocks. Among the options that are analysts like Interact Investor are the Dodging Cox Worldwide's global stock funds and also Fundsmith Equity, which is managed by the well known investor, Teddy Smith.
• 18:36
  And just to give you a flavor of of how these funds invest, so the Dodge and Cox Worldwide Global Stock Funds, it invests in value stocks. So as a result, the fund is trading on a cheaper valuation than the global stock market. And Fundsmith Equity, as mentioned, is managed by Teddy Smith. It invests in high quality companies with strong competitive advantages, which are typically based on having significant intangible assets. Both those funds are underweight, the magnificent seven stocks.
• 19:07
  They do have some exposure. In general, you know, if you if you're invested in a global active funds, they will typically own a couple of the magnificent seven stocks, but they are unlikely to own all of them. And I think it's a very bold decision if a full manager doesn't have any exposure to the magnificent seven given the fact that those stocks account for around 20% of the MSCI World Index, which is a index that many global funds benchmark their performance against. So as a result of those stocks being such a big part of the index, they are difficult for active for managers to completely ignore. My thanks to Craig, and thank you for listening to this episode of On the Money.
• 19:47
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• 20:13
  And I'll see you next week.