Building a portfolio under Covid-19

The whipsaw of the last two months has had many re-examining their portfolios. I am definitely one of them and will share my evolving thinking on positioning. The array of short-term outcomes seems as wide as here as at any time in my investing life.

Should an investor be positioned bearishly or bullishly? I think the answer in an unknowable world is to be positioned to do ok under either scenario. In other words, a portfolio that isn't optimal for the bull or bear outcome, but will do ok in both and be flexible to pivot as new information emerges.

Hopefully your portfolio already had its building blocks in place in February. For me, this was 60% in the best risk/reward global equities I could find, a 10% holding (6% at cost) in the world's highest quality gold miner and a 30% cash cushion (which I've written about before,https://superfluousvalueblog.wordpress.com/2020/04/25/the-case-for-holding-cash/).

Whatever your beliefs about the market and however you structure your portfolio, it made sense to be more aggressive by the end of March than you had been at the end of February. Lower prices lead to higher future returns, period.

What that looked like was different to everyone. I tried to pivot towards a higher exposure that left more room for action in the event of further declines. I got about 9% longer, however as my other equities fell I remained around 30% cash. This was a balance I was happy with and still am. I believed I could survive the bull or bear scenario with it, partly because it was ideal under neither outcome.

A huge rip to the upside seemed an unlikely move- maybe that's why it happened. I am torn between feeling like I neglected my duty as a value investor to get longer when opportunities were plentiful and the fact that this outcome was unknowable and I am well positioned for further weakness. I believe this stance will be vindicated and that economic reality will catch up with the market in time, but I also accept that this is unpredictable and once again am positioned to survive either scenario.

One thing I would note is that while the NASDAQ is nearly up for the year, my watchlist is deep and plenty of non-US deep value equities are only marginally recovered from their March lows. It would only take a minor resumption of the bear market to push them back into GFC-like value scenarios. There is a reasonable chance of this happening as the inevitable economic re-start takes us into unchartered territory over the rest of the year.

There have been comments made about the level of bearishness accompanying this rally. All I would observe is the logical inverse of my earlier statement- if it made sense to be more aggressive at the end of March, than the end of February- then it makes sense to be more defensive in early May than you were in late March. I haven't sold into this rally yet, but the chance to get pre-Covid 19 prices for some of my equities is looking more and more appealing.

Once again, we are at a juncture. Surviving is the ultimate mark of success in investing. I am confident that if I don't blow up over my investing career the end result will be more than enough.

So what does a portfolio look like that survives the bull and bear scenarios today? I'm not one for capitulation and am quite stubborn, so I won't be chasing sprinting equities from here. I'm happy with those that I own and think that my discomfort means that I have the balance about right.

I consider this balance to be the mid point between all-out defence and risk of future regret if the market runs away into a blow-off top and am trying to stay as long as possible because I think there are select opportunities, mostly in non-US markets (https://superfluousvalueblog.wordpress.com/2020/04/23/fertile-hunting-grounds/).

I believe the next logical extension is that you should be more defensive here in early May than you were in February. Obviously not all will agree with this, but at February levels we had no knowledge of Covid-19, 20% unemployment or recession. Once again, price paid determines return.

So my portfolio pillars will continue to be deep value equities, my holding in Barrick and a generous cash cushion for now.

Guy

PS. Please don't take this as market advice as I'm not a financial advisor. I'm talking about what I'm doing relevant to my own circumstances and if you are unsure about your own, please seek professional advice.