My worst month ever, at least since I have tracked things rigorously and monthly, was March 2020. That was the month that the covid-19 penny dropped, with lockdowns starting across Europe. My portfolio dropped 13% that month, after a 6% drop the month before – making my biggest drawdown -19%.
Once-a-century pandemics aside, my worst month in 9 years saw drops of about 6%. 2018 Q4 saw two separate months (October and December) that my portfolio dropped 6%. Aside from these 6%-drop months, I haven’t seen any my portfolio drop more than 4% in a month since I started tracking, 9 years ago.
So I was somewhat tense at points in January to see my dial dropping at times by 10% on the month earlier. The month rallied towards the end, leaving me down 7% on the month. Leverage was definitely my enemy , as equity markets fell everywhere.
Equity markets fell everywhere except, of course, the UK. What seems to have happened is that frothy growth stocks have lost their froth. And the UK has hardly any such stocks. Money coming out of frothy growth has chased defensive value, or oil/energy stocks, or inflation-assisted banking stocks, and the UK has plenty of defensive value, resource plays and financial services.
UK’s bonds, in contrast, had a miserable month. The barrage of inflation news is clearly somewhat to blame. But I’m not sure why that impacted the UK more than twice as badly as other bond markets.
My subportfolios tell a slightly more granular story:
- Passive market indices: down 5.4%, measured in USD. Leverage was hurting me here; the underlying drop in my assets was less than 4%, but as this account is leveraged it dropped by significantly more.
- Tech stocks: down 14%. Again, leverage hurt me – my assets dropped less than 10%, but leverage made that 40% worse. Amazon and Google, two big positions, both dropped around 10%. But smaller companies dropped more – HUBS was down 25%. And it wasn’t just in the USA: Rightmove dropped 19%. I have closed out my QCOM position, reducing my leverage by about a quarter.
- US industrials: down 3%. The assets only dropped 2% here, before leverage increased that. Berkshire Hathaway was actually up – prompting stories of its tortoise catching up with the tech hare.
- Australia: down 18%, measured in USD. Ouch!! My outsized holding in XRO was down 20%. And the currency was down 2% too. In USD, the index was down 10%. And leverage hurt me here as elsewhere.
Leverage, leverage
As to leverage, I have been swimming as fast as I can to keep my level of leverage under control. I have just about managed to maintain my position. My leverage ended the month at 29.5%, which was in fact down from 30.7% at the end of December. Maintaining my position, when the markets are moving as fast as they are, required a lot of paddling.
How did I manage to keep my leverage under control? Was I frantically selling stocks? No, I resolved in January that after trimming my overweight US exposure, I will try to not be a net seller to control my margin – this counts as being a forced seller in effect. Instead, trimming my US exposure freed up some funds I used to reduce margin. But I also had a mini windfall from my nasty (private bank account) debt fund – which returned a five figure capital sum. I had a small deferred payment from a previous windfall/exit. And I raided my ‘6 month cash’ pot to pay off a further amount of my margin. So in total my loans outstanding are well over £100k lower than a month ago, and this has enabled my margin to track the drop in my portfolio.
I ended January with my asset allocation pretty much within my monthly tolerances, except that 1) I remain a bit overweight to the USA, and 2) I am over leveraged compared to where I want to be, in GBP in particular.
In the meantime, my expenses have skyrocketed, with the Coastal Folly needing all manner of ‘investments’. Beds, new car, furniture, gadgets, etc. These are short term and fairly small beer in the scheme of things but my ‘feeling rich‘ post of a few weeks ago already feels rather out of date.
FIRE v London 
FirevLondon, if you were not subject to the risk of margin calls (e.g. all debt was fixed rate 5yr mortgage) would you feel the same pressure to manage the %leverage. Or would you just let it run and have faith that divis would cover interest costs and that markets would rise over the long term.
For example. Have 1 million in post tax shares, levered with 500k 5 yr fixed 1.5% mortgage. So 2k monthly payments, of which £625 is interest, £1,375 capital repayment. So if your 1.5 mil needs to yield 1.6% in order to cover your repayment mortgage costs of 2k a month. Obviously there is the psychological horror show of a 50% drop, at which point you are looking at going below zero. But that’s the game here. And of course the refinancing risk in 5 years.
Brodes
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yes it is the notional risk of margin calls that has me paying attention. I am some way away from that point but even so right now I am about 3% ‘short’ cash versus my target exposure, and I want to get closer to the target if at all possible – even if markets are falling.
This is not fully rational – if markets drop 30% then I am going to have to accept being out of balance for a considerable period – but in the meantime by prioritising repayment versus other uses (of windfalls) I do have some influence over this, and I am using it.
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I follow your posts with great interest and am but a Minnow in comparison FvL. I have used similar brokers to you apart from IB and I am interested to know if you dabble in FX as part of your strategy and what your opinions of IG are? They have an automated Smart Portfolio offering from BlackRock which I have found profitable and proved particularly resiliant in this last “correction”.
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