Retirement: Choosing New Investments During A Market Crash For The Future-Proof Portfolio For Young Investors

Summary

• With my Future-Proof Portfolio For Young Investors, I am building a model portfolio for young investors to eventually retire on.
• Every half year, I am deploying new funds in this portfolio - come and take a look at my new investments.
• Even though we are going through a worldwide crisis, investment does not stop.

Let me be open and honest about this: investing during an economic and healthcare crisis feels terrible. It is difficult to make rational investment decisions in these times while a large part of the world is locked down and millions of people are losing their jobs.

The last month has been a roller coaster ride, not only on the worldwide markets but also in most peoples' personal lives. I am in the incredibly lucky position to be able to do my regular job from home and am not directly affected by the economic part of this crisis yet. If the crisis deepens and drags on long enough, of course, my job security might be at stake as well. This is why it's of the utmost importance to have your personal life in order before starting with investing: make sure you are living well below your means and have some spare money to make sure you can survive for a decent period of time, should your income stop. The last thing I would want to do is to sell my investments on the market bottom out of necessity.

My portfolio

Just to refresh our memories, the Future Proof Portfolio for Young Investors currently looks like this:

Name	Ticker	Shares
Consumer
Unilever	UL	43
Disney	DIS	22
Archer-Daniels-Midland	ADM	83
Diageo	DEO	69
Accell	OTCPK:ACGPF	42
Armanino Foods of Distinction	OTCPK:AMNF	488
Amsterdam Commodities	OTCPK:ACNFF	92
Industrial
3M	MMM	17
BASF	OTCQX:BASFY	37
Union Pacific	UNP	18
Kone	OTCPK:KNYJF	44
Eaton	ETN	44
Vestas Wind Systems	OTCPK:VWDRY	35
Healthcare
Medtronic	MDT	29
Roche	OTCQX:RHHBY	10
Gilead Sciences	GILD	15
Johnson & Johnson	JNJ	17
Novo Nordisk	NVO	43
Utilities
Consolidated Edison	ED	31
National Grid	NGG	109
Ørsted	OTCPK:DNNGY	21
Technology
Corning	GLW	110
TSMC	TSM	54
Infosys	INFY	134
Automatic Data Processing	ADP	20
Tencent	OTCPK:TCEHY	45
Telecom
Singtel	OTCPK:SGAPY	994
REITs
Realty Income	O	46
Ventas	VTR	44
W.P. Carey	WPC	19
Hannon Armstrong	HASI	56

Click to enlarge

For the total loss/gain of this portfolio two weeks ago and the total figures of money invested, see this article which I wrote two weeks ago in the depths of the market turmoil.

Selecting new investments

After the huge and quick downturn, markets made a significant recovery during the last couple of weeks. This means that, even though most stocks have dropped significantly during this crisis, we are definitely not buying at the bottom. I would not even be surprised if we haven't seen the bottom yet, which means that it might be possible to buy more shares for our retirement accounts in the future for even lower prices. But I have no idea where markets are heading on the short term, the only thing about which we can be relatively confident is that on average, stocks will trend up on the long term. Time in the market beats timing the market. This is why we must also stick to our plan even in very uncertain situations like this one.

One of the things which this economic crisis will likely bring along is a decent number of dividend cuts. In my selection of new investments, I will try to focus on companies which are of a good quality and have a low possibility of having to cut their dividend during this crisis. This is why I will not invest more money in my REIT positions at this moment. Though most of them have greatly decreased in price, the uncertainties surrounding them are just too large to warrant the deployment of new capital in their shares at this moment.

One more note about dividend cuts: I do not believe that all dividend cuts are bad. Companies might temporarily decide to lower their dividend because of a bad year, large capital investments or other valid reasons. I rather own a company that does this instead of taking on more debt to continue paying a dividend. Of course, a dividend cut often signals that bad times are coming for a company so it's probably almost never a good sign.

The following companies which I already have in my portfolio look attractive at the moment from a risk/reward perspective: Archer-Daniels-Midland, Diageo, Unilever, 3M, BASF, Medtronic, Gilead Sciences, Corning and Automatic Data Processing.

From this list, I am excluding 3M, BASF, Archer-Daniels-Midland, and Corning because I already rebought these shares relatively recently (with very mixed results by the way). The utilities from my portfolio all look decent investments but are too expensive at the moment, which is the same with most of the healthcare names of which some are trading near all-time highs again.

This leaves us with the following names, here depicted with some basic data and some estimates about the dividend safety and COVID-19 crisis risk. 1 is lowest, 5 is highest.

	Current price	% from all-time high	p/e	dividend yield	dividend safety (1-5)	crisis risk (1-5)
Diageo	£ 27,11	-23%	21	2,5%	4	3
Unilever	€ 45,68	-19%	21	3,6%	5	1
Medtronic	$103,33	-13%	26	2,1%	5	1
Gilead Sciences	$ 83,99	-29%	20	3,2%	5	2
Automatic Data Processing	$141,08	-22%	25	2,6%	4	3

Click to enlarge

A couple of remarks about my estimates: I estimate the crisis risk of Unilever and Medtronic to be very low since Unilever is in the food and hygiene business which is usually well insulated from crises such as this one. Medtronic might even profit from the crisis. Gilead has a lot going on lately because of their drug Remdesivir which might be a possible cure for COVID-19. I estimated their crisis risk a bit higher at 2 because they are now doing much effort to test Remdesivir which could lead to a setback if the drug does not work. Still, they could benefit the most from this crisis. Diageo, as a liquor producer, is much more exposed to the COVID-19 crisis. People will continue to buy liquor, but because many bars and restaurants around the world are closed these days they will sell less. Automatic Data Processing is a company that could suffer from the crisis on the longer term. Their payrolling business will not stop, but if people continue to lose their jobs this will lead to less income for them.

I estimated the dividend of all of these companies to be relatively safe with a decent payout ratio (50-60% for most of these companies). Unilever and Medtronic probably pay the most solid dividend since these companies are probably very little affected by the crisis. ADP and Diageo are solid as well, but since they might suffer from the crisis they are certainly less dependable than the other companies in this list.

There is one other outlier in this table: for all of the companies the all-time highs are relatively recent, except for Gilead, which reached its all-time high in 2015. Their share price is actually up 29% year-to-date.

To be honest, all of these companies look quite expensive to me, especially considering we are currently in the middle of a crisis. Their earnings might drop which would further increase their P/E. This is especially the case for Diageo and ADP.

New possible investments

It's always a good idea to look around to see if there are possible investments that are not yet in your portfolio. For this, I have a couple of watch lists, in which I add or remove companies from time to time. Let us take a look at a very thinned-down selection of companies that I currently find interesting. Again, be aware that the dividend safety and crisis risk metrics are only estimates.

	Current price	% from all-time high	p/e	dividend yield	dividend safety (1-5)	crisis risk (1-5)
A.O. Smith	$ 41,08	-38%	18	2,3%	4	2
Sonova	F 177,90	-16%	19	1,6%	5	2
Alphabet	$ 1279	-11%	26	-	-	3
Essity	SEK 305,10	-5%	22	2,0%	4	1

Click to enlarge

Let us briefly discuss each company:

• A.O. Smith (AOS) is a water heater and boiler producer which is operating worldwide. The company is a very dependable dividend payer but has been down 38% since their all-time high in the beginning of 2018. Water boilers are a business that is probably not directly exposed to the current crisis, but in a crisis people could choose to postpone the renewal or maintenance of their water heating system. In this way, they are not insulated in the best possible way.
• Sonova (OTCPK:SONVY) is a Swiss manufacturer of hearing aids. This is a very safe and stable business, dominated by only a few companies. Most customers will be relatively old people though, and since those are most at risk from COVID-19 they might postpone the purchase of new hearing aids. Their dividend is not high but solid and very dependable.
• Alphabet (GOOGL) is a company that everybody knows and does not need an explanation. They currently do not pay a dividend, which technically excludes them from my portfolio, but I'm making an exception in this case because I think they are currently valued attractively. With a P/E of 26, this does not mean that they are cheap. Also, I expect them to be relatively exposed to the current economic crisis. When the economy goes down, advertising budgets will move in the same direction. The company is very solid though and has more than 100 billion in cash which acts as a buffer should things get worse.
• Essity (OTCPK:ESSYY) is a Swedish company specializing in hygiene products such as wipes, diapers, feminine care, and wound care. This is a company that has been on my watch list since very long, but I never found them attractively valued enough to buy. They are still not cheap and being well insulated from the current economic crisis they are only down 5% from their all-time high. Their dividend is small but dependable and their growth is slow but steady.

Making a decision

In the types of market conditions where we currently are, it is more important to focus on fundamentals and future prospects of companies than at valuations. During the next months and years, valuations and P/E values will likely change dramatically for almost all companies. I did not choose the cheapest companies for my lists, but I tried to focus on stocks that have good fundamentals and future prospects. I also try to pick companies that are unlikely to have their underlying business model be challenged by the COVID-19 epidemic. For this reason, I will not choose ADP and Diageo. Also, I think Gilead in a bit of a gamble at the moment, as is A.O. Smith has a large exposure to China. I am not sure how this crisis will influence international relations in the long run.

I believe the other companies are all valid investments for a portfolio focused on the long term. Of these (Unilever, Medtronic, Sonova, Alphabet, and Essity), I chose to buy the following shares last Friday the 17th of April:

32 shares of Unilever at € 46,02 for a total of € 1472,64

9 shares of Sonova at F 175,60 (€ 166,97) for a total of € 1502,71

In total, I spend just below my target of € 3,000 euro for these purchases.

In the future, I will continue to update my portfolio now and then to be able to see its performance. Beating the market is not my purpose, especially not on the short term. My purpose is to select solid companies that have good prospects for the future and are likely to still thrive in a couple of decades. Stay tuned for my future updates!

Disclosure: I am/we are long ALL STOCKS IN MY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.