Investment lessons learnt during stock market volatility

You can also listen on: Spotify, Apple Podcasts, Amazon, Google Podcasts

Stock markets have experienced an uptick in volatility over the past couple of months amid uncertainty over US President Donald Trump’s tariff policies. In this episode, Kyle is joined by Craig Rickman, ii’s personal finance editor, to discuss the lessons investors can learn from the stock market sell-off. Kyle also crunches the numbers to see how different types of funds have fared since stock markets started their descent, with the data showing the power of diversification.

The episode mentions a recent webinar that took place in which interactive investor experts answered questions from customers regarding the sell-off. For those who missed it, you can watch the webinar here: Investing through the storm: Q&A with ii experts on market volatility.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On the Money, a weekly look at 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've 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 that we've not covered the recent stock market volatility on the podcast, we should dedicate an episode to it. But there's been a lot of coverage already on why the sell-off occurred, so I want to instead mainly focus this episode on what we can learn from the sell-off and [also] from other stock market sell-offs that have taken place throughout history.

I've also crunched some performance numbers to assess how different types of funds fared during the sell-off.

Joining me for this episode is Craig Rickman, personal finance editor at interactive investor. For those who didn't see it, Craig, alongside three other ii experts, 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 for this week's episode.

Craig, for those who didn't tune in, could you give us a flavour of the sort of questions customers were asking about the sell-off?

Craig Rickman, personal finance editor at interactive investor: Indeed, I can. So, there was a really interesting mix of questions. 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?"

Another asked, "How can investors nearing retirement protect their portfolios during economic uncertainty?" So, yeah, a real mix of questions that captured what investors were thinking and feeling at the time.

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 a 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 8 April, the S&P 500 index had lost 20% of its value from its earlier all-time high, which was achieved on 19 February.

When a stock market index falls 20% or more, that’s called a bear market. Meanwhile, the technology Nasdaq index, at its worst point, lost nearly a quarter of its value from its pre-Christmas peak. Now since then, both the S&P 500 and the Nasdaq index, have been making a partial recovery on the back of Donald Trump pressing the pause button on tariffs for 90 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 fall at the same time.

• When markets fall, here’s what to avoid doing
• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis

Craig Rickman: Absolutely. And I think that the big thing there is where you are in your investment journey. So, 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, if you're still saving for retirement, for example, and you've got many years on your side, if markets drop, you can buy shares at cheaper prices [so] 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.

That's one side to it. The other side is if you're encashing shares in falling markets, 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.

Kyle Caldwell: At times such as these, when there are heightened levels of stock market volatility, I think it really tests your mentality as an investor. If you are concerned that you may panic-sell when stock markets fall on bad news, then it may be more suitable for 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 does away with the risk that you may put all your cash into the market just before a nasty dip. This strategy benefits from something that's known as pound cost averaging. So, when stock markets fall, the regular investment purchases more shares or fund units. Conversely, when stock markets rise, fewer shares and fewer fund units are bought.

Having said that, the data does show that while there's no guarantee, of course - you could get your stock market timing terribly wrong - 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.

Stock markets do look fragile in the short term due to uncertainty over the unpredictability of Donald Trump's policies, which many columns already written [say] could prove to be inflationary and harm both US and global economic growth.

But it is when stock markets sell off that investors are offered the opportunity to try and buy low, provided they are 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.

In 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&P 500 index an average of 19 months to recover from a fall of 20% or more.

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 statistics 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.

The data that Schroders based that on was the MSCI World Index, and it looked over the last 53 years, and it found that the 10% falls happened in 30 of those 53 years. Whereas for falls of 20% or more, that happened in 13 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 got to remember that volatility is part of the course with investing, and it is the price investors pay for the fact that over the long run, putting your money in the stock market and 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. Diversification, of course, involves owning a mixture of different asset classes and different fund types.

• Investment outlook as US/China force world to pick sides
• Where to invest in Q2 2025? Four experts have their say

Craig Rickman: Yeah. Diversification is a drum that's repeatedly beaten by journalists, investment experts, and financial advisers. But 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, the idea here is that you spread your portfolio across different asset classes, like shares, bonds, maybe commodities as well, gold - we know how well that's done recently - but also across different regions and sectors around the world.

The idea is that if one area is struggling and underperforming, others are there to support them. So it's really a way of spreading your risk. There's a familiar saying, 'don't put all your eggs in one basket'. If you were to drop one basket and the eggs smash, you've still got other baskets and other eggs.

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 performed during this period of stock market volatility. I looked at how funds fared since US stock markets started their descent, which was on 19 February. I ran the data from that date to 24 April, and the figures are from FE Analytics.

So, over that period, first, I want to look at US funds. The average US fund 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%, while 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. 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.

So, there are Investment Association Mixed Investment Sectors, which are multi-asset funds. We looked at the two lower-risk ones. So, the IA Mixed Investments 0% 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 equities but plenty in bonds still, they've also limited losses. So, the average fund in the IA Mixed Investment, 20% to 60% Share sector is down 3.9%.

Now, another renowned investment strategy is the 60/40 portfolio. 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.

Over this particular sell-off, a fund that follows this approach is Vanguard LifeStrategy 60% Equity, 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.

I also looked at performance numbers for a small number of wealth preservation investment trusts that prioritise protecting investor capital. So, when there is a stock market sell-off, you'd expect these trusts to keep losses to a minimum.

We've written many articles about these wealth preservation investment trusts over the years, and I've spoken a lot about them on various podcast episodes. The three main ones are Capital Gearing Ord (LSE:CGT), Personal Assets Ord (LSE:PNL), and Ruffer Investment Company (LSE:RICA). 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.

Over this period, one of them actually made a small gain of 0.7%, and that's Ruffer, while Capital Gearing and Personal Assets held up very well too. They limited losses to -0.9% and -0.7%. There are, of course, other options for investors looking for defensive exposure in a portfolio, such as money market funds or gold or 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 vs reward when making their own investment decisions.

Craig Rickman: I think there are two aspects to risk versus reward and risk tolerance. The first is what you are 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 happy to take big risks? 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, there would be a risk-profiling process, which would involve quite a lot of conversation, also an electronic questionnaire. The electronic questionnaire would kick out a risk profile that it thought was suitable for that individual, and that would generally be bunched into certain levels.

So, it could be that you're somebody who takes very low risks, low to medium, medium, medium high, and high. So, that's one side of it. But with specific investment decisions, sometimes it can make sense to deviate from that. I think a good one is when it comes to saving for retirement. So, talking to some younger investors, they would often describe themselves as as lower risk or more cautious, and the questionnaire would support that.

But when it comes to retirement savings, if you've got 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. 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.

On the other side of that, you can have someone who sees themself as a bit of a risk taker. But if their investment time frame is short, and they may need the money in a couple of years' time, for example, to pay for school fees, then they may take or want to take a more cautious approach and look at safer investments as a result.

So, that's the two things. It's understanding, firstly, what you're 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.

• Ian Cowie: four ways to tap into a potential trade war winner
• Stockwatch: is trade tariff risk really receding?

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. At times 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're giving them time.

I wanted to end by pointing out that if you look back at all the major setbacks for stock markets in recent times, such as the financial crash, the European debt crisis, Russia's invasion of Ukraine, and the Covid-19 pandemic, stock markets recovered from all those crises.

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 going to make my best guess, I would say that I think it's going to take longer than it took stock markets to recover from the Covid-19 pandemic.

Stock markets, they're always looking for a catalyst, and with the Covid-19 pandemic, when the vaccines were announced, that gave the stock markets the catalyst to recover. Whereas this time, there's a lot of uncertainty over the tariffs and what the policies will look like, how governments across the globe will respond to the tariffs, and how they'll retaliate with their own countermeasures.

I just think there's a lot more uncertainty over the shape and form tariffs will take. 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 think now's a good opportunity following this sell-off to do a spring clean of your 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 a sell-off in the future that occurs for a completely different reason.

If you own both global and US funds, take a good look at them. 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&P 500 index fund or ETF and you also own a global index fund or ETF, then you're going to 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 our analysts like at interactive investor are the Dodge & Cox Worldwide Global Stocks fund and also Fundsmith Equity, which is managed by the well-known investor, Terry Smith.

Just to give you a flavour of how these funds invest, the Dodge & Cox Worldwide Global Stock fund invests in value stocks. As a result, the fund is trading on a cheaper valuation than the global stock market, while Fundsmith Equity 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. They do have some exposure.

In general, if you're invested in a global active fund, they will typically own a couple of the Magnificent Seven stocks, but they are unlikely to own all of them. I think it's a very bold decision if a fund manager doesn't have any exposure to the Magnificent Seven given that those stocks account for around 20% of the MSCI World Index, which is an index that many global funds benchmark their performance against. 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. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. If you get a chance, leave a review or a rating in your podcast app too. We'd love to hear from you. You can join the conversation, ask questions, and tell us what you'd like to talk about via email on OTM@ii.co.uk. And do check out our website, ii.co.uk, where you'll find more information and practical pointers on how to get the most out of your investments. And I'll see you next week.

On The Money is an interactive investor (ii) podcast.