2018 is coming to an end and I am on my way of making a review of what my portfolio went through this year.
So in the beggining of the year my portfolio looked like this :
Apple – 20%
Microsoft – 15%
Facebook – 15%
Exxon – 10%
Verizon – 10%
Visa- 10%
AT&T- 10%
Micron – 5%
Randgold -5%
In the first look it might not look super diversified , but I am not a big fan of having more than 15 stocks in a portfolio. First of all it is too hard to follow all of them thoroughly and second of all diminishes your returns and shows you are not confident in your picks.
This portfolio actually brought me some very nice returns of about 20% with the major upmovers being Apple Microsoft Verizon and Visa.
Of course I had my laggards in the face of AT%T , Micron and Randgold, but no one can predict every stock pick perfectly.
What makes my style a bit different is that I follow the macroeconomic situation quite closely and the stage at where the market is at. So after I stayed with my portfolio about a year I started not feeling comfortable holding it. After checking a couple of factors I decided to move my money into savings account and wait until the next downturn.
For some this might seem like a silly idea, but I know it is my strategy and is right for me. I am ready to wait 1,2,3 years rather then seeing my portfolio down 50%. I just feel we are in for a downturn and I see this based on a couple of factors.
1. The total stock market cap to GDP is at nearly all time high
For me this is a very good indicator about the amout of overvaluation we have in the markets. Usually the market cap and the GDP should be about equall. Right now this metric is at 151% , the only highest point since the 50s is the dot com bubble of 2000.
2. The US debt level is at historic ranges.
As you can see the only time since the 1900s we had a debt in the US that big has been in the WW2. The bigger problem is that the deficit is increasing which means that the US debt is getting bigger and bigger. I don’t know how are things going to develop, but I would rather wait on the sidelines and see.
3. The US corporate debt is at historing ranges.
Another thing that stops me from investing my money right now – we are at the same level we have been in the 2000s and in 2008 in terms of the corporate debt. The cycle is repeating itself over and over again and we are in the end of it.
4. The yield curve is flattening
The graph shows us that every time after an inversion we have a recessions following. Of course nothing is guaranteed 100% , but this has been a very clear indicator of a coming recession in the past.
5. The FED is tightening their money policy.
We had a decade of easy money with interest rates at historic lows and money were flooding the markets. That resulted in boom in asset prices as the S&P quadrupled over the last 10 years and if you have been invested in the stock market or real estate you have probably made some money.
Now comes the reversion of this trend – the FED is rising interest rates and taking the easy money away. Until I see that trend reversing I do not feel comfortable investing in stocks. After all the FED is the biggest player in the markets and their decisions ultimately have the biggest impact on the market.
6. Valuations have been getting out of control
In the last couple of years we had the FANG stocks going up in value like crazy. For the ones that don’t know FANG stands for Facebook Amazon Netflix and Google. Don’t get me wrong – all of those are amazing companies and I am a customer of every one of them I just don’t agree with their valuations. Google and Facebook have come down a bit and do not seem so crazy overvalued as of right now, but Amazon and Netflix are still staying at sky high valuations despite their recent pullback. To me it doesn’t make any sense Netflix to have bigger market cap than Disney, Tesla bigger than Daimler, Amazon bigger than Walmart and so on. We are going to go back to reality and see things at their real valuation, but until then I am staying away from the stock market and high PE stocks in general.
So these are the biggest reasons my portfolio as of the end of 2018 is looking like this :
– Cash and cash equivalents – 100%
Sometimes cash is king and right now I feel most comfortable holding cash at meager 1.5% interest. Until anything from the reasons I showed changes I am going to keep saving and keep increasing my cash position. If I miss a couple % of gains so be it, I feel the downside right now is bigger than the downside.
I am going to keep this post short and to the point and that is my portfolio summary at the end of 2018. All in all good year for me – realised 20% gains, learned a lot about the stock market and macroeconomics and I am feeling pretty good going into 2019 with my portfolio.
Do I regret something about my portfolio in 2018 ?
One thing really – panic buying into Micron into the beggining of the year. Panic buying deserves a separate blog post in the future, but that costed me a bit lower returns in 2018. I had Micron on my radar for a while and I saw it going up and up and up for a while. Then I started having the feeling that I am going to miss out on those huge gains and I hopped on the train when it was too late. After that the price has gone down month after month. While I still believe Micron is a strong gompany long-term the sentiment around it is very bad and it would take some time before they turn that around. The fact that it doesn’t pay a dividend makes it really hard to hold during downturns aswell.
For a finish I just want to let everyone know that this is my personal approach and this is what works best for me. Everyone is different and everyone should have his own personal strategy for the stock market. After all I can be right, but I can be wrong , no one can predict the future, we can only make an estimate but nothing is right or wrong 100%.
Please make your own due diligence before investing in the stock market as that carries a certain amount of risk of loss of capital.
Hope that was an interesting read for you and wish you all a happy New Year !