 Hi, and welcome to Bright Minds from Tick Mill. I'm your host, Patrick Munnaleen. In this series, we're setting out to answer some of the most commonly asked questions around investments and trading through entertaining and insightful conversations with seasoned insiders. Throughout history, financial crises have tested the resilience of economies, industries and traders. From the Great Depression to the more recent global financial crisis. These pivotal moments have reshaped the way we view and navigate financial markets. While the chaos of these events can strike fear into the hearts of investors, by adapting your investment strategy, it's possible to weather the storm and there are even potential opportunities for smart traders to profit during turbulent times. The COVID-19 pandemic provided a remarkable example of how markets can be profoundly affected by crisis. In the first quarter of 2020, global stock markets experienced one of the most dramatic sell-offs in history, which saw the Dow Jones Industrial Average losing 12.9% of its value in a single day, and UK GDP declining by 9.7%. Despite this turmoil, traders who were willing to take calculated risks and enter the market at the right moment managed to capitalize on the volatility leading to substantial gains. Trading in crises demands a unique set of skills and an understanding of how market dynamics can shift rapidly. It requires not only a keen eye for spotting opportunities amidst chaos, but also the ability to manage risk effectively. Stakes are high, as the wrong decision can lead to significant losses. So what causes recessions and market volatility? How are current events affecting the market? And what can we do as investors to protect our capital and ride out a downturn? To give us some insight into these topics were joined by Jo Groves. Jo is a qualified chartered accountant and had a career as an investment banker for 20 years before moving into the world of journalism. She currently writes on all aspects of investing for Forbes and the Evening Standard. Jo, thanks for joining us today. Could you start off by telling us a bit more about your career so far? Sure. First off, thank you very much for having me on the show today. I start off training as a chartered accountant at Arthur Anderson, who were then one of the larger accountancy firms. I worked in the audit department. I think gave me a really good grounding in finance, but I decided eventually it was time to seek a job where my client didn't avoid being like the plague. So I joined close brothers who are a UK investment bank working in the corporate finance department, mainly on acquisitions and disposals for corporate and private equity clients, very long hours and a steep learning curve, but really interesting to have that insight into corporate transactions. I then dropped to working part-time when I had children and having that free time really sparked my interest in investing. I have an interest in mortgage and a pension backed by investments. And while I had a financial advisor, I felt I really should be able to take control of my own investment. So I took the plunge and over the last 15 years, I've really enjoyed developing my investment knowledge. I've definitely learned as much of my mistakes as my successes. I also really enjoy chatting to friends and family about investing. I promise only when they ask me to. One of my passions is to break down barriers to make investing accessible to everybody. So as you mentioned, I decided to join the investment team at Forbes, where I write about investing for Forbes provides the UK and the evening standard. Wow. Could you briefly define the terms recession and volatility? I guess through your 15 year track record now personally managing your your finances and investments, you've experienced both. And could you give us a quick overview of what causes both of those elements? Sure. I think that's a really interesting question because both have been very much on the menu for investors over the last couple of years. So starting off with recessions, I guess it's worth differentiating between what's a more challenging macroeconomic environment, which we've definitely seen and what technically is a recession, which is two consecutive quarters of negative growth in GDP. Fears of recession very much prevalent than financial press last year. We had the perfect storm of high inflation, high interest rates, high government borrowing. And I think recession was widely anticipated in the second half of last year. We saw GDP fall slightly in quarter three, but actually it then defied expectations by being flat in quarter four. So we slightly kind of avoided the recession. And actually looking over the years as a whole, the UK was the fastest growing economy in G7 groups. So double that of France and the US. But turning into 2023, much more widespread pessimism that UK was going to enter a recession at some point. I think it's looking marginally more positive, but it's still very finely balanced. I think one of the factors is that consumer spending accounts for two thirds of GDP in the UK. So when we have a squeeze in the cost of living as we're having at the moment, that significantly raises the risk of recession in the UK. You mentioned causes. I think that's useful to look at because it's useful for how we set up our portfolio for investing through recessions. So as we know, we entered a recession after the global financial crisis in 2008. GDP fell by 6%. Took around five years for that to recover. In terms of causes, I mean, these are very well documented, but we saw the collapse of the global financial crisis in 2020. We had a fall in consumer spending and confidence and kind of so it went downwards. We then saw a recession again in 2020 as global economies reeled from the impact of the pandemic lockdowns. We had a falling consumer demand. We had severe disruption of global supply chains. And as you mentioned earlier, GDP in the UK fell by 10%, which is the worst in 300 years. So we had a fall in consumer spending and confidence and kind of so it went downwards. We then saw a recession again in 2020, which is the worst in 300 years. But actually three years on, GDP is almost recovered in the UK and it's higher in the Eurozone in the US. So it fell more sharply, but it recovered more quickly than in the global financial crisis. So if we take a kind of overview, I guess recessions are a normal part of the economic cycle. They generally happen over eight to 12 years and they typically recover around three to five years. So as investors, we've got to be prepared to position to invest through recessions as well as kind of times of economic boom. In terms of volatility, that's a measure of the function of the fluctuation of the price of an asset. So the percentage it changes and over what time period. So if it fluctuates considerably over a short time, it's said to be highly volatile. And there's a volatility index, it measures the expected volatility in the S&P 500 over the following 30 days. And that's inversely related to the S&P 500. So if we see the S&P 500 falling, we see the fixed rising, we see the increase in volatility. And we see investors starting to fear a stock market crash, which can become self-fulfilling if it triggers panic selling. Unsurprisingly, we saw the VIX spike in 2008 at the global financial crisis and also in 2020 at the start of the pandemic. But actually even after that, it remains slightly elevated in 2021 and 2022. We have fears of a possible recession. We had the invasion of Ukraine. And we had fears of a wider banking crisis. We saw the collapse of Silicon Valley Bank in the US and the rescue of credit suites in Europe. Looking now, I think relative calm has been restored. The volatility index has fallen back to near average levels, but it's obviously still something that could be spiking up in the future. I think probably worth mentioning at this point. We all know Warren Buffett, legendary investor, but one of his supposed quotes is, rule number one, never lose money. Rule number two, never forget rule number one. And I think it's certainly true to say that the easiest way to make money in the long term is not to lose it over the short term. So if your asset's falling by 50%, it needs to rise by 100% to get you back to break even. So I think some investors are comfortable with volatility from equities. Some aren't, particularly there, for example, about to draw a pension. So I think overall volatility definitely worth considering if you're looking at ways of positioning your portfolio more defensively. The get rich quick scheme is what draws a lot of people into it. And like you say there, one of the key elements really is preservation of capital before profit on capital. And people often overlook that. How do you think current events are affecting the market? And especially in terms of the VIX, we've seen such a dampening in the VIX with, I guess, also the attraction of these zero date options. A lot of money is flowing into those. And prior to that, people would have been protecting the downside by maybe allocating capital to the VIX. Whereas now they're just chasing upside with these zero to date option expirations. As you say, there's still a high level of uncertainty in the market and that is creating potential risk and volatility for investors. I think you asked about current events. I would say geopolitical risk still very much takes centre stage. Not only the conflict in Ukraine, but also relations between the US and China. And we have a high level of economic uncertainty that as we've discussed at that downturn may develop into a full blown recession. And I think the main issue here is inflation. It's falling in the US from 9% to 4%. But the UK inflation remains stubbornly high. We saw it hit a 40 year high of 11% in October. And it's still the highest in the G7 at just under 9%. In the UK, inflation is not forecast to fall back to the 2% target until late next year. So I think it's going to continue to be an issue. And as a result, we've seen central banks hiking base rates. We've seen 10 in the US. We've seen 12 in the UK. I think it looks like it may have peaked at least for now in the US. But the UK rate looks likely to increase further, potentially 5.56%. So in terms of how those current events have played out on stock markets over the last 18 months, I think the US and the UK have been on very different trajectories. 2022 saw a bloodbath for the tech heavy Nasdaq index. It fell by a third. Meta and Tesla hit even harder. They saw drops around two thirds. And we saw interest rates taking their toll on tech stock valuations. And with fears of recession, the investor sentiment switched very much from great stocks to more defensive options. And the FTSE 100, which is full of blue chip plodders in more defensive sectors, reaped the rewards. It delivered a 1% gain in 2022, not huge but notable given steep falls elsewhere. And it broke through the magic 8000 barrier in February this year. Some of the key performers there were commodity firms. They benefited from the rising prices. So we saw the likes of BP and Shell reporting bumper profits. Also investors attracted by the high dividend yields on offer. But over the last few months we seen a complete reversal in fortunes helped by the more positive economic signals in the US relative to the UK. We see the FTSE 100 down by about 5% in the last couple of months. Nasdaq up by about 10% and a third year to date. So I think investors seem to be more bullish. They're tempted back into growth stocks, trading at a discount. We've seen Tesla doubling. We've seen NVIDIA's share price almost tripling this year. So I think people are being tempted back into those stocks that perhaps are trading at lower levels and they have been historically. And I think that the fears of recession for the UK are very much weighing on valuations. The full impact of interest rate increases I think are yet to be felt fully by borrowers. We've got around 1 million fixed rate mortgages coming to an end this year. Many of those are at sub 2%. So I think those rising borrowing costs are going to start to bite unfortunately. Add in high inflation and we'll probably see quite a steep drop in real disposable income and that as we talked about that starts leading to a falling consumer spending that puts down was pressure on corporate earnings and stock market. So I think current events in the UK looking rather more pessimistic at the moment. But that said, stock markets are obviously forward looking. So the bad news is priced into some extent. What I think of inflation remains sticky and there's more base rate increases that's likely to put further down was pressure on stock markets. So I guess that would be it would be pertinent to think about how how people manage their investments during potential turbulent times and what are some of the strategies such as defensive investing and diversification that investors can employ? Yeah, definitely. I think defensive investing is something that most investors are looking at the moment. Well, I think probably before kind of getting into detail of that, you know, I think as I'm sure you agree, there isn't a cookie cutter approach to defensive investing. I'm sure those of us that work and invest in were often asked for advice by friends and family. They think we'll pull it out of our back pocket in five minutes and off they go. But it has to be tailored to appetite for risk and your investment horizon, whether it's defensive or otherwise, you know, we all know that risk is in the eye of the beholder. So I'll be prepared to accept losses because we want higher gains or are we more cautious and we want to limit our downside. Actually, Phoebe made some interesting points in her podcast that women have tend to have a lower appetite for risks and male counterparts. So I think you've got to think about your level of risk. And if you can't stomach the ride, you probably shouldn't be pursuing a more high risk strategy in terms of your portfolio. And then investment horizon, you know, are you investing for a pension in 20 years time? Are you potentially investing for a couple of years for a house deposit? We know the stock market is naturally cyclical. It tends to fall around 20 to 50 percent every eight to 10 years. It took stock markets around four years to recover after the dot-com bubble and the global financial crisis. So rule of thumb is to invest for at least five years and if that's not the case, probably should be looking at more cash based investments. So coming back to your question about uncertainty, I think diversifying your portfolio across different assets is a good idea. So equities and bonds and possibly alternative assets such as commodities, that's going to help smooth hopefully average returns of volatility. The proportion will vary by investors we've spoken about. Often there's a 60, 40 rule, 60 in equity, 40 in lower risk assets such as bonds. And typically bonds and equities have been a good hedge. So during the global financial crisis, we saw equities falling. We saw bonds rising as investors sort lower risk assets. But last year was the exception where we saw bonds and equities fall for the first time in 30 years. And actually it was a degree of the fall that was fairly unprecedented. Global bonds fell by 30% last year, UK even worse. And it was the worst performance in bonds in more than a century. You know, we saw a hike in interest rates that pushed down bond prices. We saw unfunded tax cuts in the UK that were later reversed. But all of these kind of things weighed on the bond market last year and bonds ended up becoming rather reliability rather than a safe asset. But if you put last year aside, bonds have been a pretty good addition when there's uncertainty. If we look over the 40 years to 2021, bonds delivered a real annual return of around 6% versus 7% for equity. So a pretty good return in relative terms. And then there's alternative assets you could consider. So commodities potentially the top performing fund sector last year, average return of around 20%. Often grouped together as one asset class, but actually they can be very different. Often gold is seen as a safe haven in times of uncertainty. So we saw the price spike after the invasion of Ukraine. And again, after the collapse of SVB is currently trading near its all time high. It can be a very good hedge, but it also can be quite a fickle friend at times. And then we've got industrial metals. So for example, lithium and nickel, they're seen as key materials and the transition to green energy. And as a whole host of other commodities, oil, gas, agricultural products, all of which tend to be a bit more cyclical than precious metals. But if we step back and look at commodities, they can be quite volatile in terms of price. So probably something worth only having potentially five to 10% of your portfolio invested in and potentially going more towards a multi commodity ETF rather than a single commodity. And then finally, there's absolute return funds. They aim to deliver positive returns, whatever the market. They can be a good way of making modest returns and avoiding losses. So I think in a nutshell, defensive investors probably want to look at diversifying across equities and bonds. More risk of risk of investors might choose the highest proportion of bonds and potentially adding in other assets such as commodities if you can stomach the volatility along the way. Yeah, I guess so. Thinking about conservative investors and those with a, let's say, a more healthy risk appetite. What are some of the psychological factors such as that fear and greed in trading during crisis? How can they impact decision making? Yeah, I think that's a really interesting question because as you mentioned those factors, fear, greed, others can have a huge impact on decision making and actually collectively they can trigger that downward spiral and become self-fulfilling because the stock market starts to kind of spiral towards a crash. In terms of fear, I think probably number one fear for investors is losing money or potentially missing out on gains and that can lead to either panic selling or it can lead to inaction and indecision. In terms of greed, I think nearly all investors seek financial gain, so that somewhat goes without saying. But greed is more about excessive gains and if you're Michael Douglas Fan, you might have watched the film Wall Street where he plays the character of Gordon Gekko who says greed is good. But unfortunately, greed isn't always good for investors because it contemptors to seek high-risk investments, kind of chasing those high returns and then you end up potentially increasing the risk of losses because you're not really making good decisions based on your long-term investment principles. And I think greed can also contribute to a herd mentality where individuals are following the crowd and they're not carrying out their own research. We've seen a rise in popularity of social trading and I think that can be a really good resource for investors in terms of sharing ideas. But again, there's a risk that you get people pumping and dumping stocks and you're the one that's bought the overvalued stock and you suffer the loss afterwards. I think in terms of greed, I mean, I did about you, but I think we also come to greed at one point. I bought shares in investment platform, Hargreaves Lansdown on that IPO. They raised 10 fold over the next 10 years. I should have sold them at that point, but I stayed invested because you hope that the gravy train's going to keep going. Unfortunately, it didn't. They're now a third of that high. So I think we can all learn lessons in terms of greed, no matter how long we've been investing for. And you mentioned the VIX index for volatility. We've also got the fear and greed index. So low value suggests a high level of fear where investors may be overly pessimistic. And we saw that at the start of the global financial crisis and also the pandemic. And a high value is a high level of greed. So potentially overly optimistic and perhaps market will start to correct itself. And we saw that in late 2020 where markets rallied as people started to hope for a COVID vaccine. I think one of the main pitfalls agreed and arguably fear is buying shares on the dip. So shares that you think are a bargain. And apologies in advance to cat owners. But I think the risk here is the so-called dead cat bounce. So when the dot-com bubble burst, we saw nine major rallies in the Nasdaq. Summers high is 45 percent. But after each rally, there was a new low and overall the Nasdaq fell by 80 percent in that period. So I think it's really difficult to time the bottom of the market. And I think another pitfall is probably panic selling. So fear gets a better view. You sell your investments to sit out the downturn, but you'll then risk missing out on the recovery. And if we look at Pete Detroff, the FTSE 100 fell by 50 percent in early 2009, but increased by the 60 percent in the following 12 months. And similarly in the pandemic fell by 36 percent, rose by 22 percent in the following year. So I think as investors, it's hard, but we've got to take a deep breath and try to hang in there really. I was guilty of this in the pandemic. I sold some of my portfolio. And if I hadn't, I'd have made a much higher return. So it can be quite frustrating. But I think it's time in the market that counts not timing the market. So we've got to stay invested through the ups and downs if we can, because it's almost impossible to get the timing right each time. Yeah, I mean, and especially at the moment, it's quite hotly debated amongst the analyst community, whether or not, certainly the US markets are entering a new bull market or we're actually in one of the most aggressive bear market rallies that we've witnessed in recent times. And so what are some of the ways in which investors have previously managed to profit during a crisis? We saw nearly two million people becoming day traders in the UK during the pandemic, which is a pretty amazing statistic. And I think platforms have really opened up trading to retail investors. We've got trading derivatives and we've got access to real-time data streams, advanced trading tools. So I think day trading is no longer limited to the large institutions as it was. And we know that traders exploit short-term price movements. So actually, volatility during a crisis can mean high profits if you're a trader. And if we look back over the last couple of years, commodity traders have seen a huge spike in profits from the geopolitical crisis in Ukraine. That led to soaring prices for commodities such as oil, gas, and wheat. And that caused large fluctuations on commodity markets for traders. In terms of other ways of profiting as a trader, I suppose short-selling in our falling markets is another option. We looked at 2019. The most shorted stocks were Tesla, Amazon, and Apple. If you looked at the same list now, it would be heavy in UK retailers so Ricardo, Kingfisher, Boohoo. But I think short-selling can be a controversial practice, particularly when it's carried out by hedge funds who obviously make quite significant profits when share prices start to fall. I think we probably all know the story of GameStop when the institutional short sellers were caught short in their investments in GameStop which is a traditional bricks and mortar video game retailer in the US. It was hit very hard by the lockdown. It was shorted heavily by the hedge funds. And private investors coordinated a huge buying spree and managed to push up the price of the shares by 1,700% meaning that the hedge funds took heavy losses. And if you're interested in what your documentary there's a very good one on Netflix on it called Eat the Rich which covers it in a very entertaining way. But obviously shorting is a genuine strategy. Billionaire hedge fund manager George Soros made a billion dollars from shorting the British pound during Black Wednesday in the 90s. Michael Burry another hedge fund manager made a hundred million dollars personally from shorting the US housing market prior to the global financial crash. So shorting can be highly profitable for traders. And it can be quite a good tool for investors in terms of hedging portfolios against short-term volatility. So for example here you could look at inverse ETS which rise when the price of the underlying asset falls. I took out a FTSE 100 super short in the early pandemic. It goes up by 2% for every 1% fall in the FTSE 100. So it can be a good way of reducing risk for short periods of time during volatility. I mean volatility is an opportunity for traders as investors it's probably important to try to avoid and ignore short-term volatility and focus more on the long term. And so once the market genuinely starts to show signs of recovery following a downturn what's the best way for investors or traders to rebalance their portfolios for future gains. Yeah we've talked about having that kind of having a core of defensive investments but I think it's still worth even at the same time keep your diversified portfolio. So you've got some higher growth more interesting investments around the outside perhaps small caps or high yield bonds or commodities. And as we know stock markets are ahead of the economic cycle so they usually fall before a recession but they recover typically six or 12 months after recession ends. So as you've mentioned we've seen a rebound in tech stocks this year is that the early sign of a recovery or is that a false dawn I think the jury's still out on that one at the moment. But as we start to see clearer signs of recovery I think investors will naturally want to review and rebalance their portfolios so probably reducing the defensive core increasing exposure to higher growth equities again the proportion and type will depend on your appetite for risk but potentially increasing exposure in small caps large caps tend to do better in a recession because they've got more stable cash flow they've got the financial firepower to weather a downturn but small caps tend to outperform in rising markets because they tend to have superior earnings growth. I think another thing to think about is long-term structural winners so markets with good long-term growth potential AI as we all know is a very hot investing topic at the moment investors are very keen to back the AI pioneers I think Microsoft probably surprised from its competitors with the success of chat GBT but it's actually quite a difficult one for investors because they're not many pure play publicly listed AI companies so investors might be looking for exposure for example via semiconductors so the likes of AMD and Nvidia software Microsoft and Alphabet for example or looking more at the adoption side of things so potentially financial services or healthcare companies I also think this is probably quite a good area to invest via funds I've just written an article on best AI funds for investors there's a small number but there's a range of different themes and we've seen some quite attractive gains already in that area with you know five-year returns of more than 100% in some cases in terms of other themes I think there's obviously the transition from fossil fuels renewable energy that's going to require a huge increase in capacity over the next few years we've also got other growth markets electric vehicles cloud services cybersecurity I think ethical investing is likely to be here to stay it's had a fair amount of criticism of late you know whether it's style over substance whether when push comes to shove will shareholders really be willing to sacrifice profit the companies to pursue ESG criteria but I think it's a theme that will be likely to continue so I'd say worth repositioning your portfolio to include some high growth markets and companies but also staying diversified and backing a number of horses I think in terms of returns those really high returns at the last ball run are unlikely to be repeated over the next few years one of the takeaways from chatting to fund managers is some of them see double digit returns from mainstream equities as less likely over the next three to five years so I think while investors probably will be hoping to make a high return from equities and cash I think it comes back to that greed point of resetting expectations not chasing unrealistic returns and being disciplined about investing Joe thank you so much for joining us today and for your insights where can our listeners find you online? Oh that's a very good question well there's a wealth of articles first off on Forbes Advisor UK with more detail on some of the things we've discussed today I also reposted my articles on LinkedIn and also on Twitter under the highly creative name JoeG All Things Finance and I also run online courses for teenagers on money management investing including students taking their Duke of Edinburgh Awards so if you're interested in finding out more about that you can visit my website moneymadesimple.co and just want to say thank you very much for having me on the show I've really enjoyed chatting about investing Excellent thanks very much Joe