Corona Crisis: Conclusion
With this short series on possible economic scenarios I wanted to illustrate to you how I think about recent events. First of all it is important to think in terms of scenarios. This helps keeping an open mind and not focus on only one economic outcome. Further, one can assign probabilities to each scenario. Even though there is no way to calculate objective probabilities, assigning probabilities helps to put things into perspective even more. In my personal opinion I would give the scenarios of quick recovery and recession a probability of 45% each leaving a 10% chance to the scenario of a depression. Please note that a depression has by far the lowest probability, but still this scenario is being talked most about in the media.Talking about a depression raises the most attention and gets the most clicks, despite the fact that it is the least likely scenario.
Implications on Investing
Furthermore I would like to briefly talk about the implications of these scenarios for investing. In my opinion it is prudent to build an investment strategy that takes into account each scenario. For example that means to hold at least 10% to 15% of the portfolio in gold. Gold acts as an insurance and can protect your wealth in a depression. To account for a recession it would normally be prudent to hold a portion of the portfolio in AAA rated government bonds that give you liquidity and have somewhat of a negative correlation to the stock market. However, 0% interest rates and high government debt make government bonds a less attractive investment. An alternative could be to hold some cash instead and/ or go into investment grade rated corporate bonds. At last, to thrive during a quick recovery, it is best to hold stocks. As most investors had stocks before the crash that means not to sell all stocks and also use low prices to buy and thereby lower the average entry price. The different probabilities of the scenarios show themselves in the weighting of each asset class. Because a depression has, in my opinion, the lowest probability I would only invest 10% to 15% into gold (someone who thinks a depression is more likely would invest more into gold). The rest of the portfolio would be distributed into stocks and bonds/ cash, where I would slightly overweight bonds/ cash, because of the higher volatility of stocks.
Finally it is paramount to maintain a positive outlook. Even the worst case of a depression would be mastered within a couple of years. In any case we will master this health crisis and likely enter a new era of prosperity and economic growth.