COVID-19: Bear Market 100% S&P 500 Investment Strategy

"The markets generally are unpredictable, so that one has to have different scenarios. The idea that you can actually predict what's going to happen contradicts my way of looking at the market.
george soros
- George Soros

I don’t mind if Stocks crash because my investment strategy will generate higher returns. Could you lock-in high returns in a Bear Market? More importantly, can it be done so that you don’t have to predict which way the market will go this year? Without diversification and only investing in Stocks? Here is an example of how it works.

Keep reading:

  • If you want to invest only in Stocks during a Bear Market e.g. during Coronavirus pandemic
  • If you’re intellectually honest and know you can’t time the market but want to generate returns no matter if the stock market will do down or up in 2020
  • If you have a tolerance for Short Term losses  
  • If you can monitor the market fairly regularly and invest on the way down
  • If you have an overall Medium Term Investment Horizon (up to a few years)
  • If you want an investment that is cost effective
 

The health situation worldwide is very difficult. The economic reality is adding to the stress. Market seem to be disconnected from reality (see this excellent take on this fantasy world here) which makes the situation even more confusing. Consider generating passive income while focusing on health, family and more important issues during COVID-19.

What follows is a COVID-19 ‘all-weather’ Stocks-only high returns investment strategy. This assumes you have a time to cash out of your investment when the S&P recovers – which it always has done historically.

1. Objective

You may start your reading by going though the 10 rules to deploy savings in a bear market.

The analysis below elaborates on the actual implementation. It does not take into account prior holdings and focuses only on deploying savings during the Coronavirus bear market. As such it needs to be analysed in the wider context of your personal objectives, risk tolerance and investment horizon. The analysis and numbers are illustrative ONLY and have the objective of providing a framework of analysis only.

I have already implemented a variant of this strategy in parts of my personal portfolio a couple of weeks ago after the initial c. 35% drawdown in the S&P 500.

READ  How to invest in stocks during a Market Crash?

If helpful, the spreadsheet can be provided upon request

POSSIBLE SCENARIOS

It is useful to consider all plausible outcomes. For the current investment situation I’d assume three potential scenarios for COVID-19 ‘all-weather’ investment strategy:

BASE CASE

To stay on the conservative side I assume that the current rally is a bear trap that will ultimately reverse. It is likely that the S&P 500 will drop to 2,500 or may retest the lows of March 23rd. Ultimately, I assume that base case goes as low as 2000 points for the benchmark Index. It would recover in the second half of the year. This is in line with a number of Wall Street strategists and shouldn’t come as too controversial.

OPTIMISTIC CASE

This is not a bear trap and market will consistently rally. While I assign a lower probability to this scenario than the Base case it remains a plausible path forward. It can’t be ruled out that one of the c. 700 studies currently performed on COVID-19 will result in the following: (i) a cocktail of medications containing the disease (ii) or/and a successful vaccine on an accelerated timeline. Note, that the market always discounts these events much earlier than the economy. E.g. Friday’s rally partially on the back of Gilead study (even if this proves too optimistic the point is that we may be getting much closer to something that works)shouldn’t come as too controversial.

STRESS CASE

This scenario assumes that the S&P drops to 1600 points and subsequently recovers. This broadly assumes medications are not successful in the short term. Or/and FED liquidity injection / bridge is not enough and reopening of the economy is a failure (aka multi round – ‘no single round’ which the FED is betting on as per game theory). It may result in massive bankruptcies and potential depression. I don’t even want to think about the ramifications of this scenario, hence I won’t elaborate here. 

COVID-19 ‘all-weather’ investment strategy
Illustrative Example of Base Case Scenario

2. Assumptions and Limitations

For sake of simplicity I assume to have max. 130k USD to deploy for long term returns

  • Assumes one would have already deployed capital so that at current S&P levels (2850)  60k of the funds are invested in the S&P 500
  • This serves only as illustration to show that there are effective strategies for long term returns assuming one has a tolerance for short term losses
  • This strategy is based on S&P levels and NOT deployment of capital through regular time intervals. Time interval investing is another way of deploying capital that is not illustrated here 
  • It has the disadvantage that capital is not fully deployed in Base and Optimistic scenarios – one would need to make additional assumptions here
  • However, it has an advantage of partially protecting you from tail risk should the S&P move sideways in the medium term and then plunge. This is essentially why I use this strategy as I always then to remain on the cautious side
  • I invest in ETFs to reduce idiosyncratic risks
  • For simplicity and to be extremely conservative I assume the S&P recovers to c. 3,400 points over 36 months
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3. Analysis

  • The analysis starts at 2,850 pts level of S&P 500. Let’s say you have $60k invested at that level
  • At each drawdown point (when the S&P 500 Index drops by -12%, -19% etc from initial level of 2850) you top up by $5k and you replenish the periodic loss e.g. at 2,500 level of S&P 500 you lost $7,368 that you replenish and you invest an additional $5,000. You buy $12,368 of the S&P 500 ETF. You continue doing so until there is a sustained rebound
  • The S&P ‘5k top ups’ levels are somewhat arbitrary and depend on where you would assume large buyers will come in (resistance) and likelihood of scenarios and thresholds – you can calibrate this based on your view. It could be 2,600 instead of 2,500 for example. It will slightly move your profits
  • The optimistic case assumes you don’t have to invest anymore (after initial investment of $60k and you make 19% Return from the Investment
  • The stress case assumes the S&P 500 goes all the way down to 1,600 so you have to replenish losses at each point and top up with $5k. You consume the entire capital ($130k) but your upside in 3 years is a 47% return
  • The Base case in between these two with a return of 33%.
  • In summary: In these hypothetical scenarios 2020 trough (temporary) loss rates range from 0% to 31% of deployed capital
  • However in all scenarios you end up with a net profit of 19% to 47% once the S&P 500 recovers
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4. Illustrative Results

This is a very simplistic analysis but shows that a COVID-19 ‘all-weather’ investment strategy is feasible:

  • Returns range from c. 19% to 47% depending on scenario
  • This does not includes any upside above 3,400 level of S&P 500
  • The scenario that will probably end up happening won’t be neither of these but somewhere in between – that’s why you can calibrate at which intermediary S&P levels you want to top up 
  • You can tweak this further – I also have some minor allocation to stocks I consider offering a very high risk/return profile and oil but for simplicity this is ignored here
  • I am also not going into the fact that you can diversify and get different indices. E.g. could get more defensive initially with NASDAQ but when a certain level is hit assume that tech will ‘catch up’ on losses of other industries etc.

Happy to share the sample sheet of this COVID-19 100% Equity investment strategy. If you would like to adapt this further – please  subscribe to the newsletter to get a copy!

Stay safe and healthy!

DISCLAIMER – the views expressed here are my own personal views. The above is a simplistic generic scenario analysis. The information provided is general in nature only and does not constitute personal financial advice. You should consider the appropriateness of the information having regard to your objectives. You should consider your financial situation and needs. Seek professional advice where appropriate. This website is not affiliated with any of the investment firms for which products are described here.  These are meant to be illustrative investments. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to in this article, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. 

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VanillaSky
VanillaSky
2 months ago

Interesting one – I would like to invest on the way down and your sheet could be helpful. Thx