A really simple answer to whether you should you invest during COVID
Is CB good for you?
Hello to you! Hope you are doing well during this circuit breaker period! Well, I am definitely not doing well, not when I am unable to see Mrs Llama for such a long period of time.
But, in life, it always demands us to look at the positive side of things. Right now, I see myself spending more time with her using video conferencing.
What's so good about CB?
I no longer have to travel to work as I work from home too. The additional time is spent on family and reading up on investments. It also gives me no excuses to procrastinate from the numerous content Vince has given me to read.
It gives more personal time to think about how to craft a portfolio too. Regardless of what is happening in the markets (ah! screw all the news on whether the market is going to rise or drop), I am really happy that among my invested portfolio, 90% of it is in REITs. This is not forgetting I am holding 50% of cash for further opportunities too.
A simple and crazy point of view?
I am known to be silly, or maybe stupid to some people (probably even weird?). Because I simply hate to complicate things, and unnecessary theories too. However, how bad is COVID? How much impact will it have on us?
For those who already have a financial model for stocks or REITs, how much do you discount from your Buy and Sell target prices?
Scenario 1 - The normal market scenario
The below table is how much I'd discount from the Buy and Sell target prices. Basically, scenario 1 as displayed is based on the assumption that the investment gives 1$ each year as dividends if markets behave normally.
Potential COVID-19 scenarios to play out for next 10 years
Scenario 2 is where COVID-19 will destroy half the business and take 5 years to recover to the normal state. 10-year returns will be impacted by 15% as seen in the table compared to Scenario 1.
Wait! You must be thinking, how come I did not discount any values according to the required rate of return? Well, I did not account for any potential growth too. Hence, I assume that the growth will act as a counteract to the required rate of return for a simplistic point of view.
Scenario 3 is where COVID-19 takes 2 years to be wiped out, and market returns to normal by Year 3.
Scenario 4 is where COVID-19 is really badass and whacks businesses so badly that their earnings decrease by 70%. It then takes 4 years for it to be wiped out.
Scenario 5 is the bleakest of all situation, where COVID-19 lingers around, and the world fails to find any good cure for 7 years.
You can see that the bleakest of bleakest will mean a 25% reduction in dividends collected for investors for the next 10 years.
If a stable stock or REIT you know of has dropped more than 25% in value, I guess it could likely mean that it is undervalued.
Come on, COVID-19 is going to be destroyed one day. Even if new virus appear, humans are going to destroy them too. It is all about the timeframe, fear and investment horizon.
Well, I do really hope they do get hold of a solution out of this COVID situation. I also do hope, we are simply being overly fearful of COVID-19, and it simply is not as badass as we think it is.
~ Mr Llama