Leverage button pointing x10 position with two fingers, blue and grey tones, Conceptual image for day trading strategy.

How I protected my Leverage Portfolio in a Covid-19 Stock Market Crash

Winston Ng
Winston Ng

(This is a republished guest post by Winston Ng. A good friend of ours who has been involved in the financial markets in different capacities in the past decade. Original post here.)

Many of us with stock portfolios filled with ETFs to FAAMA (or FANG and FAAMG for all your old school like me) would have seen our stocks drop 10% in a day, and then another 10% the following day in this wonderful month of March 2020. Somewhere in between that there was a 5% bounce reversal, just to add to the volatility roller coaster ride.

But .. thats just one part of the rollercoaster ride, as we also read helpless on the spread of the Novel Corona virus at the same time.

For a generation of Investors who started investing post Global Financial Crisis at dirt cheap value (compounded with a dash of tech fuelled profits), this becomes more than just a money losing proposition; it is also ego deflating, and world view spinning.

However, in this short article, I have no intention to write about the plain vanilla, cash investors, but instead will go for the wild ones who invest with leverage! There are many articles written on what to do in a market crash, but less on what to do if you have a loan financed equity portfolio as well.

The Mandatory Market Crash Picture to prove that this article has been very well researched. Chart copyright tradingview.com.

Leverage in a portfolio is not new. Haters might say that leverage is the very cause of the Global Financial Crisis, but then again, leverage is the reason that many investors have gotten very wealthy across generations.

For myself, I have been a fan of the book Lifecycle Investing by Barry Nalebuff & Ian Ayres. In fact, it is because of this book that I started adding a balanced financing element to my portfolio. Essentially, I held my portfolio at 50% share financing, especially on high dividend low volatility stocks, many of which are listed in Singapore on the Singapore Exchange.

Lifecycle Investing — Book I love

In my far less superior brain, I would not attempt to summarise the book in a listicle, because it is a hugely important and insightful piece of work. It is a great book to read, regardless of your opinion on leveraging your portfolio.

However, now that I have a 100% leveraged portfolio, I have a very real problem. In this market crash, my unrealised losses were dropping at twice the speed of the market. In other words, I was stepping on the gas, while speeding into the abyss.

No amount of fancy charts and complicated tables assuring me that since 1939, the markets always recovered after dropping a single day of 10%, bla bla, every made it in the fog. All I could think of was my portfolio going to zero and getting a margin call from the broker to tell me that I had wiped out my account.

There can’t be a recovery, if there is nothing left in the pot.

My mind kept racing back to a former client who was nicely retired on the dividends of her cautiously leveraged portfolio of USD 1 million. However, the market had the flu (couple of years back), and overnight her portfolio went to zero, because her losses outpaced any remaining collateral value in the portfolio. Caveat is that her portfolio was extremely narrow.

Fast forward to 2020: I was largely confident that my account could withstand the shock of the nCov — Shale Oil – Supply Chain. But yet, I was tormented with a sleepless night of “what if” it followed the GFC years of 2008? Stock portfolios dropped 50 to 80% from the peak, depending on your the portfolio concentration. In my portfolio, a 50% drop would already wipe it out based on the leverage ratio.

At this point, readers probably just want to know what I did, so here it is:

  1. Sold off my highly profitable stocks to bring my portfolio to almost zero financing
  2. Watch amazing stocks drop to dirt cheap prices, and curate a buy price for each of them.
  3. Bookmark & track the Corona new and recovery cases globally (and of course stay safe, as you should too).

1. Sold off my highly profitable stocks to bring my position to almost zero financing

The immediate question I get is “why not sell the losing positions?”. Don’t you want to keep the stronger ones? I think there is no right or wrong in an all-out market collapse. The good and the better, would still lose money. I did make some educated guesses on particular industries that may be worse hit by the corona virus, but I would not let this detract from the speed of action.

By reducing my portfolio to a zero financing state, I can wait for the markets to settle at the lows. I would not have to worry if I get a margin call (assuming the portfolio has been properly balanced in the good times).

2. Watch amazing stocks drop to dirt cheap prices, and curate a buy price for each of them.

This is an essential step, because the selling off was not done in fear, but rather to decelerate the speed of your portfolio collapse. Hence, it needs to be ready to be bought in, with conviction and leverage! Otherwise, you would have taken the loss and missed the recovery (At some point, there will be a separate post on this. If not, there are tons of posts on value investing.)

3. Bookmark & track the new and recovery cases globally of the Corona Pandemic (and of course stay safe, as you should too).

Similar to point 2, but worth an extra mention because the spread of Covid-19 has been asymmetrical, with faster spreads and severities in certain cities versus others. This is important because I believe the stock market recoveries will happen in asymmetrical fashion as well, unlike the SARS period where all Asian markets recovered in roughly the same period. There could be a time difference in recoveries in the Asian markets, European and American markets, as sentiment takes on a delayed expression. (It’s clearly a developing theory, so I may share some thoughts later as well).

Closing off this topic — The lingering question will be: “What if my portfolio has taken a big loss already? Should I sell now or not?”

In my mind, with an uncompleted market crash (March 2020), I would close off any portfolio financing on dead cat bounce days for peace of mind.

Once that’s done, stay safe, wash hands often and keep some social distancing during this period!

Disclaimer: I write as a hobby on topics that I find useful to have a voice on. Nothing here represents the opinions of current or past employers, nor product recommendations or financial advisory in any form. I hope you find the writing useful.