How to Predict the Stock Market like Nostradamus

In a previous blog post, I talked about how to limit downside while protecting upside during a recession as well as why the next recession will be a major win for some. In this particular post, I want to highlight a practical example based on my public equities portfolio and how it performed during the downturn. Before digging deep into the numbers and strategies, I also wanted to mention the importance of "Juneteenth" and its significance to this country. Following the Union victory in the civil war, slavery was made illegal in the United States. This gave right to the freedom and ability to strive for the American Dream. 

With that, let us discuss how the stock market has performed year-to-date. I will use the S&P 500 index fund as the benchmark index when I make portfolio comparisons for out-performers and under-performers. Year to date, the S&P500 (IVV ticker symbol) is -4% below its 1/1/2020 share price. Although most would have predicted a much worse performance during the crisis, I would say the market has recovered really well. The pandemic gave rise to winners and losers in the market. Companies such as Zoom, Zscaler, Bilibili, Apple, Microsoft, Amazon, Facebook, Tesla, and the likes have reached all time highs during the pandemic. Fortunately, my largest three individual stock holdings are in Apple, Microsoft, and Facebook. I was also able to initiate new positions in Tesla and TQQQ (3x leveraged ETF) while adding to my positions in Bilibili, Home Depot, AMD, F5 networks, T-Rowe Price, and Ulta Beauty. I trimmed my positions in Alphabet and Berkshire Hathaway after the bounce back in the market and rotated into QQQ, XLK, and FHLC. Relative to IVV, most of the stocks have over-performed with the Technology sector benefiting the most during the pandemic given that the average consumer had to work from home. Amazon saw a surge in demand for its services and video conferences reach an all time high. Given the period of working from home, companies have started to open up to the idea of switching to remote work and its previously unknown benefits.

My strategy going into the pandemic was to dollar cost average into the market, which I successfully planned out well even with the tremendous uncertainty during that period. I had my regular 401k contributions increased accelerating when it would be maxed out later in the year. I also started putting new taxable non-retirement capital into the market on March 25th, which some might call it close to the bottom. The combination of all the moves put my stock portfolio at a +13% return YTD. If the number was annualized then we are talking returns in excess of 25%. This is far greater than the average stock market return of 7-10% and continues a good run of performance given my 2019 portfolio performance of 30%. What I find positive about the portfolio and strategy is its ability to relatively withstand major downturns and recover quicker than the overall market. 

In order to dollar cost average into the market, I made over 50+ trades in total, purchasing shares along the way. The best realized performance has been from Bilibili and Tesla. Bilibili is a Chinese video sharing website and the lock down only led to further increases in an already increasing revenue for the company. Tesla has seen production ramp back up and recently joined the list of companies who gave employees the day off on Juneteenth. The share price has risen to $1000+ from its January 1st share price of $430. More importantly, I did not go through a fire sale during the downturn since I have an allocation towards hard assets such as real estate which provides monthly cash flow that can be used to cover expenses, if needed.

It is always important to stress test your portfolio in order to evaluate your downside and protect investor capital. The easiest way to do this is to acquire companies with a wide moat and a strong balance sheet. It is important to hold some cash for opportunities such as this pandemic which presented itself and to think long term. Those who trigger sold because of fear and then parked cash without getting back in at the bottom would be kicking themselves. I do realize that everyone's situation is different and the emotional toll of the market swings might be too stressful for some to bear. To prevent such sales from occurring, an emergency fund of 6 months might be something to set-up. We cannot predict the future nor determine the shape of the recovery curve, unless you are indeed Nostradamus, but we can make educated guesses and take measured steps to optimize our portfolios. Maybe then, our predictions might contend with Nostradamus.

Financial Savant was born in 2018 and has received a really good reception so far. This blog serves as a resource to help spur open discussions on generating income, saving, investing, and overall wealth management.

Every article written on Financial Savant is based on first-hand experience and pertain to ongoing current events within the financial and economic-sphere.

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