Why You Should De-Lever Now

 While we are likely to have a very strong climb in equities for the next 1 to 2 years, we are unlikely to see the kind of strong rally we saw from April 2020 to now. We are likely to see a correction of 10 – 15% in 2021. The MSCI world has outstripped the 50 days moving average and in most cases is likely to snap back with a correction to the 150 days MA. I cannot predict when it will happen, but I surely will reduce leverage now, hold more dry powder and get ready to buy on a correction.

 

The stock market is NOT a CASINO. It is a supermarket of prices that is updated daily. The luxury and important goods and services which you wish to purchase are usually either at a huge discount or over-priced. Our decision is usually to DO NOTHING, BUY, or SELL.

 

Below is an example of 3 things you can do.

 

Scenario 1, buy and hold an index or fund to replicate global equities. If there is a 15% correction, followed by a 30% rebound, your 2021 performance will be +10.5% (table below).  (4) in the chart below.

 

Scenario 2: If you are constantly leveraged by 1x, you will suffer a 30% fall, followed by a 60% rebound, provided you didn’t get margin called. You will end up with 12% return, with 2x the volatility. You may get a heart attack and chances are you will sell at the bottom of the correction! ☹ (3) in the chart below.

 

Scenario 3: You keep 20% cash now and stay invested. No leverage. (1). When MSCI World drops 15%, you fall by 12%. When it rebounds 30%, you add leverage to 1x. Theoretically you will rise by 60%. You will end up with 40.8% return. That’s a huge difference.

 

 

Correction

Rebound

2021 Performance

MSCI World (3)

-15.00%

30.00%

10.50%

Leverage of 1x Portfolio (e.g. 5m NAV, 10m Gross Asset) (4)

-30.00%

60.00%

12.00%

Unlevered with 20% cash now (1), Levered 1x after a correction to support level of 150 days MA (2)

-12.00%

60.00%

40.80%

 

 

 

 



 

 

Below is a video on why the rally is going to be boosted by liquidity. All money printing eventually ends up in financial or hard assets. Whether you buy a Lamborghini, or buy Tesla direct, it eventually ends up in property, Bitcoin or stocks. The sales person who sold you the Lambo goes to have a Michelin Star dinner, which the cook, waiter and restaurant owner then buys stocks. In the end, everything ends up in the stock markets.

 

https://www.youtube.com/watch?v=U28596LiH4w

 

 



 

 

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