- After a historic market crash, the recovery has been almost as spectacular.
- Check out the impact of this on my portfolio.
- I will also discuss the effect of this quick market recovery on my investment strategy.
I started the Future Proof Portfolio for Young Investors more than two years ago, to serve as a model for young investors saving money for their retirement. As regular readers of my articles know, I try to select solid investments which are likely to continue to thrive decades from now. My favorite holding period is forever.
From now on, I will not be using the name Future Proof Portfolio for Young Investors anymore. The name was very unwieldy, taking up almost half of the title space of any article I wrote about it. For the sake of simplicity, as of today I will just be calling it my retirement portfolio.
Every investor has to endure some degree of volatility now and then, even people who are selecting stocks which are likely to be future proof and perform well over the long term. During the market crash of the beginning of this year, my stocks went down with the market. During the current recovery, they went up spectacularly again.
Please first take a look at my portfolio almost exactly two months ago to see how it looked at the time. After you have done this, check out the state of my portfolio at this moment, the 6th of June 2020 (all values in euro unless stated otherwise):
|Name||Ticker||Shares||Value||Weight||Total gain/loss (including dividend)|
|Archer Daniels Midland||ADM||83||3.125,83||4,40%||11,13%|
|Armanino Foods of Distinction||OTCPK:AMNF||488||1.093,54||1,54%||18,14%|
|Vestas Wind Systems||OTCPK:VWDRY||35||3.291,69||4,64%||71,73%|
|Johnson & Johnson||JNJ||17||2.217,92||3,12%||19,10%|
|Automatic Data Processing||ADP||20||2.836,59||3,99%||50,14%|
The differences are almost unprecedented. As quickly as my stocks went down the drain during the crash, they recovered at a very solid speed as well. From a result of 4,97% at the 5th of April this year since the start of my portfolio (January 2018) it has recovered to a plus of 21,74%. A couple of stocks have gained more than 50% during this process, and Accell almost doubled.
But please do not let this recovery misguide you, the economy is still in a difficult situation and some companies are still discovering the true impact of the pandemic.
Already two months ago, Accell cut its dividend. As I predicted, Disney quickly followed. Also, Singtel reduced its dividend to about half of the 2019 amount.
What I did not expect is that all the other companies which I mentioned being in danger of having to take a dividend cut did not do so yet. Especially the REITs which have been potentially hit hard by the crisis, such as Realty Income, Ventas and W.P. Carey continued to pay their dividend. W.P. Carey and Hannon Armstrong even had a dividend increase, albeit a very slight one.
As for now, I am still expecting some companies in my portfolio to follow suit and cut or decrease their dividend if economic turmoil stays around for a longer period of time. Of course I am not happy when this happens, but a dividend cut because of economic circumstances is usually less severe than one resulting from other sources like mismanagement or the uncompetitiveness of a company.
Where do we go from here?
To assess what is likely to happen in the markets on the medium term, we need to analyze what is happening on a macro level in the world now. As far as I can see, there are two important forces at work at the moment:
- An enormous economic downturn as a result of the COVID-19 pandemic
- An almost-as-enormous economic stimulus from central banks and governments
It is difficult to estimate how long the economic downturn will take, and whether the financial injections will be enough to keep most of companies and individuals away from bankruptcy. In my view, there are two possible outcomes:
- Best case scenario: The economic downturn is severe, but will not last long since the damage which has been done is temporary and not structural. People will adjust to the pandemic and slowly pick up their lives again. Businesses will reopen, consumers will start spending again and because of the huge monetary handouts, the damage can be kept at an acceptable level. Of course, some restructuring of the economy will happen as a result of the pandemic; some companies will thrive, others will have a much harder time. Just think about the difference between online buying and brick-and-mortar shops. Because of subsequent growth, debts which have been made by central banks and governments can be recouped by increased tax income without needing to increase the tax rates.
- Worst case scenario: The economic downturn will take longer to mend and many companies will go bankrupt, in spite of all the government support. Consumers are scared to spend money and will start saving more, which as a result increases the economic troubles. Only specific sectors of companies will continue to do well, such as companies supplying primary needs: food, health and a roof above our heads. Because of the very slow economic recovery, governments will have to increase taxes to pay back the enormous pile of debt they created, which will add to the already severe economic problems. Stocks are almost certain to experience a deep bear market in this scenario.
Any scenario in between these two extremes will also be possible. Also, the discovery of a vaccine against COVID-19 might have a large influence. As of today, nobody knows in which direction we will go from here. In hindsight it will all be obvious which scenario will play out, but currently we just do not know.
Effects for my portfolio
When investing, it is a useful exercise to assess what a worst case scenario would mean for your portfolio. When taking human basic needs mentioned above into account, I can identify parts of my portfolio which might be most at risk during a continued economic crisis, grouped by sector:
- Consumer: Obviously, Disney is at risk since they almost only sell luxury products. Their online business might dampen the blow, but it is only a small part of their activities. Accell, being a bicycle producer, also produces non-essential products. But in the case of the COVID-19 pandemic, bikes are actually in a good position to become more popular in the markets where Accell operates (mostly Europe). Many people commuting by public transport can start going by (e-)bike. Diageo, selling liquor, is a more risky investment at the moment than before the pandemic. Much liquor will be bought in bars and restaurants which still have limited visitors. You could argue that Armanino is at risk too, since they sell luxury food, but I estimate that the potential long term damage here is limited.
- Industrial: Most companies in this category will likely be volatile if the economy continues to be in a crisis mode for an extended period of time. But all the companies in this category are indirectly linked to one of the basic human needs, and I do not expect them to experience structural damage with regard to business models.
- Healthcare, telecom and utilities will almost by definition not be at great risk.
- Technology: Infosys and ADP might have a small increased risk, but not as a result of a direct blow to their business model. IT consultancy might take a backseat if companies need to cut their budgets, and payrolling services might as well. But eventually, these companies would have the potential to recover and continue to thrive as they did before the pandemic.
- REITs: Realty Income and Ventas might experience real blows to their business model. Brick and mortar locations will be at a structural disadvantage in the future, and these companies might have real trouble coping with this in the long run. Yes, they are well diversified and best-in-class investments, but this does not negate the fact that large groups of their tenants might have existential problems if the crisis continues for too long. Theaters, cinemas, fitness studios and office buildings will suffer and many tenants might go bankrupt in the worst case.
As for now, I estimate that my investments in Realty Income, W.P. Carey and Disney are coupled with most structural risk in a worst case scenario. Accell, Diageo, Infosys and ADP are also at risk if the economy ends up in a sustained recession.
At the moment, I advocate doing nothing. I will continue to keep an eye on economic developments and see whether economic reality is more likely to resemble my best or my worst case scenario. Likely it will be somewhere in between.
This might seem like an unsatisfying advice, but let me put it this way: investing for the long run is made up of more than 99% waiting and less than 1% doing. We should continue to analyze how the situation develops, but at this moment there are just too many unknowns to make an informed decision. I recommend you to invest this 99% in living a healthy and satisfying life, work hard, live below your means and sometimes critically review your stock portfolio. One day, maybe sooner than later, it will be possible to retire on your portfolio of stocks.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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Analyst’s 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.
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