Long Term Investment Portfolio

Last updated January 1, 2021

My portfolio is split into 3 positions: long term, medium term, and short term positions. This is my long term investment position. I ask myself 1 question when dealing with my long term portfolio: can I buy back my stocks at a lower price sometime over the next 2 years?

  1. If “YES I CAN”, I sell my stocks and wait patiently for a buying opportunity.
  2. If “NO I CAN’T”, I hold onto my stocks.

Summary

I have completely reduced my exposure to stocks in my long term portfolio (2+ years time frame). Even if stocks continue to rally, the eventual stock market decline will still fall below where the S&P 500 is today. That will allow me to buy back my stocks at a lower price.

Explanation

Several important factors suggest that we’ll see a significant correction in 2021, perhaps in the 2nd quarter. (I do not think we’ll get a 2000-2002 or 2007-2009 bear market).

Long Term Mean Reversion

The S&P 500 has surged significantly from its 2 year low:

A more dangerous point is when the S&P rallies 75% from a 2 year low. That is a 5% gain from where the S&P stands today (3915). This is how some of the sharpest, non-recession market crashes began:

We’re approaching a bearish reading for this indicator.

Surging Margin Debt

Margin debt has surged more than 50% over the past 8 months (since March 2020 bottom).

All historical cases of such aggressive positioning occurred near 1-2 year market tops. This happened near the start of the 1973-1974, 2000-2002, and 2007-2009 bear markets. The June 1983 historical case was followed by a year-long stock market correction:

Valuations

S&P 500 forward P/E ratio is quite high. Once again, I do not think “today is just like 2000”. Interest rates today are lower than where they were 20 years ago, so valuations on average should be higher than valuations from decades ago. This is bearish for stocks right now.

Here’s Price/Sales ratio for the S&P 500 technology sector:

Wild speculation

Here’s the performance of various markets from March 23, 2020 – December 31, 2020:

Market participants can notice a dangerous trend in November & December 2020. The riskier an asset is and the less intrinsic value it has, the better the asset has performed since November.

Call buying SOARED: