in this video, I tackle the fears surrounding price fluctuations in the stock market, particularly the emotions we face as investors due to volatility. I'll guide you through effective strategies that can help you manage risk but also keep you focused on your financial goals. Lastly, I'll share ways I found to help stay the course so you can ride out the highs and the lows of investing with confidence. And don't forget, if you do enjoy our content, please do like this video and also why not subscribe to our Channel. When the value of your Investments Falls, we're all scared, nobody's spared that fear, and some people liken it to riding a roller coaster. When you buy an equity portfolio, you have to ride the ups and downs with a belief that eventually it's going to pay off. But the fluctuations are large if you have 100% stocks in your portfolio, for example, if you track the NASDAQ 100 index in the United States, the volatility of that is pretty high. If we look at the annual price moves of the index, and in fact this is

one of The Trackers, which tracks the index in the UK, notice how variable the returns are from year to year. Sometimes on the upside, you get returns of 40% or more, and then of course, sometimes you get Falls of 20% or more. So if you are going to invest in equity, then you have to have a pretty strong Constitution. If you're the kind of person that would lose sleep if you make a loss, then 100% stocks probably isn't for you. So I think you have to be honest with yourself, and if you're not willing to bear that kind of risk, then don't be ashamed to have some low-risk Investments alongside your Equity Investments. For example, at the moment, money market funds are generating pretty good returns. But if you look at the price fluctuations of money market funds, notice how they're absolutely tiny compared with that Equity tracker in the top panel. Instead of 40% moves up and 25% moves down, now we're looking at movements of around 4% at most.

way to characterize the risk of crashing in your portfolio is to look at this typical annual percentage price move. Another name for it is volatility. High volatility means the stock prices are fluctuating wildly. Low volatility means that you've got something safe and boring like this money market fund. So for the NASDAQ tracker, the volatility is 20%. That means in a typical year, a 20% move up or down is absolutely normal. Whereas for the money market fund, the volatility is just 0.3%. So tiny annual moves is what you'd expect. So that's the theoretical idea behind volatility, a typical annual percentage price move. However, when people actually invest, all of that goes out of the window. They look at their portfolio day-to-day and suddenly they notice thousands of pounds or dollars movement every day. Now, if it was just going up, you wouldn't be worried. But of course, day-to-day, you could just flip a coin as to whether it goes up or down. And those down moves when you lose thousands in a single day are very

scary. So let's look at how we can calibrate our expectations about daily movements. We actually look at monetary values which are realistic instead of a percentage. We'll turn it into daily price moves. So here, I've shown £100,000 invested in equity. Say, because the volatility here is 20%, just as it was for that NASDAQ tracker. So in a single year, we'd expect a £20,000 move up or down as being completely normal. And that's if we don't see any new information. If there's a shock in the markets, we could see a fall which is much larger than that. When you actually scale volatility, you have to use the square root of time. So to convert that into monthly moves, it would turn into a £5,800 move up or down. And then if we look at daily moves, that would be a move of £1,300. If you had £200,000 invested, you just double up the volatility. So there, a one-day movement of £2,600 would be

absolutely normal, and if you have a million invested, then a 13,000 move up or down daily is what you'd expect. Suddenly, volatility doesn't seem quite so abstract, does it? But if we look at the money market fund and use the same approach, you can see that that 3% annual volatility turns into a daily move, which is absolutely tiny. It's just £19, and if we had a million invested, it would be £190. So, use volatility in this way to work out how surprised you should be if the value of your portfolio moves up and down over some period of time - daily, monthly, or annually. So, that was stocks and money market funds. Now, let's look at some other asset classes. What I've done here is to calculate the volatility of various other asset types and indices. Notice the huge variation in volatility from the riskiest stuff at the top to the least risky stuff at the bottom. Leading the risky table is Bitcoin at the top with a volatility of around 90%. Then we've got oil, which is a very

volatile commodity. There, the volatility is around 40 to 50% per year. Then we move to the riskiest kind of stocks, which would be emerging market stocks, and these would be emerging market indices rather than single stocks. There, the volatility would be around 22 to 26%. Now we get to the NASDAQ index, which over this period of time had a volatility of around 22%. And then we move via these various European indices, which have volatilities of around 20%, until we get to gold, which has a volatility of 16%. For a diversified Global stock index, you'd expect a volatility of around 15%. And then if we look at developed Market currencies, the volatility is much lower. It's between about 8% and 11%. Now these are not static volatilities. Spike when there's a crisis, but these are average volatilities over the period from 2012 to 2024. Will you might be thinking okay I don't like volatility I'd like to

reduce it well how can we do do that now if you're a single stock investor you can diversify by having multiple stocks and what I've done is I've added stocks to a portfolio starting with just one stock that's Apple. Then we do two stocks, we add Microsoft. Then we do three stocks, so I've added Nvidia. Then four stocks would also include Broadcom and so on all the way to 100 stocks, including the entire NASDAQ 100. And what I've done is I've equally weighted the portfolio, so rather than market capitalization waiting, I've got equal amounts of each stock. Notice what happens to the volatility of our portfolio as we add more stocks. The volatility generally falls; however, it stops falling at about 25 stocks. Beyond that, there's no more diversification benefit. We've ironed out all of the idiosyncratic risks, as they're called, which are due to the fates of individual stocks. And what we end up with is a kind of generalized risk from owning stocks, particularly in

US stocks in technology, with a tilt towards growth, which is what the NASDAQ is. Now, you can actually do a little bit better than that by choosing things which are not correlated with one another. For example, if you buy two stocks in the same sector, say it's two chip makers, then you'd expect their prices to be very similar. They move up and down together, and that means that all you're really doing is doubling up your risk. Whereas, if you choose two things which move in opposite directions, which aren't correlated, then that diversifies better. So, what you can do is measure correlation. That's where the two stocks move up and down in lockstep. If they do, the correlation is one. If they move in opposite directions, the correlation is minus one. And if they're not related to one another at all, the correlation would be zero. So, what you can see beside me here is called a correlation matrix. By looking at the rows and columns, you can see whether two stocks have a high correlation. The number in each square is the percentage correlation.

whether they have a low correlation or negative correlation. Notice how this Matrix is almost completely shaded in red because if you take two stocks, chances are they'll be positively correlated. What's also noticeable is that there's higher correlation within a sector, and that's because stocks within a sector have common drivers. So for example, within the tech sector, notice the correlations are never lower than about 57%. The same goes for Consumer discretionary, Industrials, Consumer Staples because they have these common drivers. So if you do want to diversify, one simple way to do that is to choose stocks from different sectors. You could also choose stocks from different countries, but you could also choose stocks which are linked to different styles of investing like value and growth. Now you can actually do better than that by going beyond the world of stocks. You could introduce other asset classes like bonds and commodities. Here, for example, I've shown five funds which all behave quite differently. Two of them are stock funds, one is UK Equity, one's developed Market equity which excludes Emerging Markets, but then we also have

gold, which is a safe haven investment, tends to hold its value when people are scared. But also broad Commodities, which tend to do well if there's a spike in inflation. Government bonds are the standard Hedge for equity because they tend to feed on fear. When there's bad economic news, bonds do well just as stocks languish. So the graph you can see beside me has risk at the bottom with high risk on the right and low risk on the left. And then on the y-axis, we've got annualized return. And this is for the period from 2012 to 2024. So what I've done is I've shown those five ingredients in the portfolio individually. And I've also shown the portfolio which combines them. Now here's something magical happens, which is that you get a free lunch. We've combined things, some of them have an atrocious return, some of them have an atrocious volatility. And what we've ended up with is something which has a stock-like return. It's in the top half of the graph.

and at the same time, it has a bond-like risk. So, by combining these uncorrelated assets, and I've chosen them very specifically to be uncorrelated, we combine The Best of Both Worlds. Of course, the portfolio will never have a return which is as high as the best-performing asset, but conversely, it'll also have a return which is never as bad as the worst-performing asset. So, that's the effect on volatility of this diversification across assets. Now, let's look at what happens when there's a crash. These graphs show you the fall from the previous all-time high. The top panel is for the portfolio, and every other panel of the ingredients of the portfolio. Notice that the crash of the portfolio is pretty low. You don't get very large Falls, and also those Falls don't tend to last very long. And that's because of this diversification behavior. When stocks crash, gold holds up pretty well. We saw that in 2020 when Commodities crash. Stocks and bonds sometimes hold up pretty well. So, the worst peak to trough fall for the

portfolio was 14%. And Only bonds crashed less; they crashed 10% in 2022. Compare that with commodities: they fell 43% in the worst case. UK Equity fell 35%, gold 36%, and developed Market Equity 26%. So if you do want to sleep well at night, I think this cross-asset diversification is probably the best way to go. It may reduce the overall return of your portfolio, but you'll still do pretty well. Now, if you want to work out the volatility but also the return of various investments, we do offer a set of tools which allow you to do that. For example, here is our Market monitor tracker, which amongst other things allows you to work out the risk-return plots for various indices. Here you can see the global financial crisis and how it negatively impacted many asset classes. The safe havens in this case were Cash, Gold, and bonds. Over the long term, as we saw, Equity markets have been the best performers, and particularly the NASDAQ index. In addition to those tools, you'll get to join our chat application.

so you can talk to me and other members of the community and ask questions whenever you want. It's a great way of getting engaged with a like-minded community to learn more about investing, and in particular, long-term investing and how to deal with a fear of volatility. We discuss that a lot. If you want to learn more about that, just go to our website pensioncraft.com. Find a link to that in the description below. Now, if you just want to have one off-the-shelf fund which does the diversification for you instead of having five funds, you just buy one. Then something like life strategy funds, which are produced by Vanguard, might be the way to go. Here you can see life strategy 20 up to 100. And all that's happening here is the amount of stocks in the portfolio is being gradually dialed up from 20% up to 100% of the portfolio, such that for Life strategy 100, it's 100% Equity portfolio. One reason why I don't like this portfolio is that it contains a lot of

UK stocks historically those have underperformed, but there is some evidence that having a UK bias may not be so bad after all. But notice what happens to the volatility of that portfolio as you dial up the amount of equity. We go from 4.9% volatility for Life strategy 20 up to 13.6% volatility for Life strategy 100. But also notice what happens to the long-term return. And this is since inception of these funds in 2011 that also increases. So we go from a return of 3.8% to 10% for Life strategy 100. So if you are willing to ride the roller coaster for a long period of time, then you can see that Life strategy 100 having more equity, in other words, is worth it. Now if you're going to be investing over a short period of time, then you probably want to take less risk. So if you need money for the deposit on a house or your children's education, then you don't want to suffer a crash.

just before you need the money, so there you dial down the risk and something like life strategy 20 or more money market funds in your portfolio would make sense. But if you are going to be investing for a decade or more, then I think having more equity in your portfolio makes a lot of sense because that will tend to increase your long-term return, as long as you're willing to live with that volatility. So we can control volatility to some risk, but we can never get rid of it all together. So how can we learn to live with it? I think the simplest approach is just not to look at your investments. If you do look at them all the time, and I think looking at them more than once a month is probably too much, then it's a sign that you're worrying too much. Because if you do see that the value of your investments has fallen, the temptation is to sell, and that's the worst possible thing you can do, particularly for index investors. Usually what happens is you sell at the first

sign of trouble. Markets quickly snap back, and then you're left in cash, looking at prices which are now higher. So, what you've done is to crystallize a loss, and you're out of the market. So, simply forgetting that you own a portfolio in the first place, once you decided on a good one, I think that probably gives you the best outcomes. Now, personally, I find the statistics behind what happens with stocks very reassuring. I'm a nerd, and for example, when I was scared of flying, the flying death stats were actually very low, and I found that quite comforting. Similarly, with stocks and other investments, I like the statistics because they tell me what to expect. And while it's true that stocks crash every 5 to 10 years, the average duration of a fall from the previous all-time high is actually really short. It's just a couple of months, and that means if you do sell at the first sign of trouble, then you're going to have this problem with the snapping back of the market. I also tried to create a rule.

of thumb, which looks at the probability of markets falling by a certain amount over the coming year. I call it the 26/16 rule. So, the crash probability is 2%, a bear market probability is 6%, and a correction probability is pretty high. It's 16%. If we look across other markets, that was for the S&P 500, we see a similar pattern. The probability of a 30% or greater correction is around 2 or 3%. So, personally, I find that quite reassuring. Maybe stats isn't your thing, so we'll think of something else. How about not spending so much time in front of a computer worrying about your investments? Personally, I find going out for a walk with my dog, Teddy, very therapeutic. He doesn't worry about stocks; all he worries about is fetching sticks, sniffing, running around, and having fun. So, I try to be more doglike when it comes to my investments. Just live in the moment and don't worry about the future so much. Plan for it by all

means, but try to get out in the outdoors and do some exercise because that usually takes your mind off your investments. Because worrying is not going to improve your returns anyway, but it will have a bad effect on your health, both physical and mental. So what methods can we find to help stay the cause? Because I think that's the greatest discriminator between people who do succeed in investing and those who don't. What I found to be very effective personally is to simplify my portfolio. And as a visual metaphor, here's a very minimalistic room. Now, my portfolio is very much like this room. It's just got one fund in it, and my only regret is that I didn't do that sooner. So, I've got one global stock fund. That may not be appropriate for you. You may not like the risk that comes with that. Perhaps something like a life strategy fund, which is blended and has bonds and stocks in it, perhaps that would be more appropriate for you. If you want to add a little bit more complexity and flexibility into your portfolio, you

could have a two-fund portfolio. Here you'd have a global stock fund that generates long-term returns, remember, and then to iron out some of the fluctuations in that portfolio, the volatility, you'd have a safe investment like a money market fund. Or alternatively, a global bond fund. Or you could even do a bond ladder. The reason why simplicity helps is that there are less moving parts. You'll understand the portfolio better. There's less things you can change, which is a good thing because you're not worried about fiddling with the portfolio. You still have the flexibility of de-risking. For example, if you've got the two-fund portfolio, you could increase the amount of the safe assets and reduce the amount of risky assets. And if you've got a single life strategy fund, you could switch from, say, life strategy 80 to 60, which is a bit less risky. But personally, I've just found this minimalistic approach to investing incredibly helpful and very powerful. Now that's not to say I don't have a messy portfolio alongside.

that but 90% of my investments are in that core minimalistic Chic type of approach, and 10% of my investment are an absolute mess. That's my fun portfolio that gives me the opportunity to play and to learn, but also of course to learn by losing money. But it doesn't really matter because it's a small percentage of my overall investments, and if it's volatile, it doesn't really matter. Plus, it has the added benefit that it keeps my hands off the core investments. It's also good to be disciplined about putting money into your portfolio and then in retirement withdrawing money from your portfolio. Ideally, you'd automate that. So during the accumulation period while you're working and building up your investments, perhaps you could automate the investments with a direct debit. Many platforms allow you to invest very cheaply if you do that, and that discipline will probably lead to a very good outcome. Similarly, in retirement, if you plan your withdrawals such that they won't be too high and that the money will last for the course of your

retirement, then you'll probably end up with a better outcome than if you hadn't planned in the first place. But I think one of the most helpful things when it comes to keeping going is speaking to people of a similar mindset. Our pension Community provides this sense of accountability; people ask questions, they admit to doing bad things so that other people can learn I do that too, and that way it ensures that you stay on course. Investing can be a very lonely business; often it's the case that your family isn't involved, or they don't care or understand what you're doing. So, by having that community of like-minded people, I think you can actually stay on course much more easily. So, I hope this has provided you with some tips on how to approach volatility. It's something that we all have to live with; none of us like it particularly when things are really bad and there is a market crisis. But I think there are certain coping mechanisms that hopefully you've learned about today. So, if you do enjoy our

content. Don't forget, please do like this video, subscribe to our Channel, and also consider joining our community. It's very reasonably priced, and you can find out more by going to our website, pensioncraft.com. And as always, thank you for listening.

Riding the Stock Market Roller Coaster - Navigating Volatility

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

If you want to learn how to become a better investor then why not join our friendly membership at pensioncraft.com?


Riding the Stock Market Roller Coaster - Navigating Volatility

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