Dry Powder

That Dry Powder You Have? (You’re Better off Snorting It)

Do you have some funds that you keep aside in case of ‘market opportunities’? aka ‘Dry Powder’. Tempting isn’t it? Plow some funds in when the market is cheap – I hear you – wanna get those bargains!

Have you read the important notes before proceeding any further? It’s a requirement.

Keeping Dry Powder

Except it doesn’t work.

Unless you are extremely lucky.

Or skillful.

But probably just lucky.

My Meeting

A few weeks ago I was presenting to the investment committee for a large pension plan of an academic institution. The pension plan is a sizable pool of asset with several hundred millions of dollars. The school is large and well respected with a super-high-powered investment committee. They are the great and the good of the investment community who are generally retired investment professionals drawn from banking and private equity and are providing their services to the school. Most of them have their own Wikipedia pages.

So this committee knows a thing or two about investments, and we had planned that my update to the Committee would take 30 minutes on the agenda.

After 80 minutes I emerged bruised and bloody.

But victorious.

Market Timing

The key contentious issue was whether we should be market timing a certain investment change that was being recommended.

Some of the Committee had a clear preference to time our investment change, whereas I strongly recommended that we should proceed the way we had planned and not second guess where the market was going.

The key point I was trying to make was the difference between strategic asset allocation, and tactical moves.

Tactical Moves

I’m guessing that you will have a particular risk tolerance and return requirement and have decided on an asset allocation that works for you. You might hold 60% equities, 80% equities, or even more. Hopefully you have given this some thought and are investing in a strategic asset allocation that works for you.

Any movement away from this strategic asset allocation is a tactical move. If you delay investing, or hold assets in cash in case you see an ‘opportunity’, then you are making a tactical move.

Stop it.


The Price of Being Un-invested

I saw a very interesting chart from J.P.Morgan Asset Management. Take a moment to digest it.

Timing the market
JP Morgan Chart on Timing the Market

The height of the bars shows the value of $10,000 invested at the beginning of 1998. If you had been fully and continuously invested in the market during that period you would enjoy a lump sum of over $40,000.

However if you had been timing the market and happened to miss the 10 best days over that period then your sum would be halved at around $20,000.

You only need to miss the 30 best days over this period and your return would be negative…. Negative!

So being out of the market can cost you dearly and this was discussed in my posts about dollar cost averaging.

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Market falls are an emotional period. It’s difficult to see your losses and feel the fear that is amped up by the hysterical media. But you have to beware of thinking that you are going to call the bottom or the top. That is almost impossible.

J.P.Morgan observe that six of the ten best days occurred within two weeks of the ten worst days. In other words if you lose your nerve and dis-invest through a falling market you are highly likely to miss many of the best days for market gains.

Don’t think that you will calmly sit out the market turbulence and then coolly re-enter the market and snap up all the bargains that other more experienced investors have inexplicably missed.  It won’t happen.

Get on with your life, enjoy your loved ones and invest for the long term.

What about you? Do you hold some funds in cash waiting for an opportune time to enter the market? Are you waiting for a market fall in order the snap up some bargains?


Note that I am not talking here about an emergency fund. That is a set amount of money that you hold in cash to self-insure against adverse events. I’m presuming that you are not using this fund to time the market. The desirability, or otherwise, of an emergency cash fund will have to be the subject of another blog post. But I certainly don’t have an explicit emergency fund.

25 thoughts on “That Dry Powder You Have? (You’re Better off Snorting It)”

  1. Ha! Click bate title! I had to see what you were writing about! Very, very good point. I’ve seen the statistics about missing the best days of the market before (maybe from you). We all think we’re smarter than average. And none of us is. Glad to hear you emerged victorious from the meeting!

  2. Love the title and we’ve made this mistake in the past! The numbers speak much louder than our emotions. We have to keep them in check! It’s great that you were able to get the committee to “see the light” on this one!

    1. actuary on FIRE

      You can’t ignore emotions in investing,we’re not robots. But emotions rarely enhance returns!
      Thanks for visiting Vicki ?

  3. Nice post! I know people who’ve had “dry powder” since the S&P500 was below 2,000 points. The problem is when the buying opportunities emerge everybody is too scared to jump in, e.g. in February 2016 when the S&P dropped to just above 1,800 or recently when we got to the 2530 again. Stay invested, my friends!

  4. No dry powder here. The efficiency frontier states I should hold stocks up to my max risk tolerance, no more or less. If I am willing to hold less in good times it’s not truly my risk tolerance since you never know when a up turn can occur. If I am willing to hold more in down times then it’s not truly my risk tolerance since you never know when the next down turn can occur. Until I become a genie with a magic 8 ball so shall it be.

  5. I always am amazed when people hold money and wait. I try to continuously invest, buy in good times, buy in bad, buy, buy, buy.

  6. I just buy as and when I have the money. Almost every buy is automated. The exception is when I see the market go down – I have sometimes taken the money earmarked for paying off mortgage (extra payments) and invested. Find that hard to resist.

  7. I love these kinds of articles – every time I get overconfident that I can time the market, I need this slap in the face. The stats don’t lie. Good post.

    I do keep an emergency fund, but in my mind it is always sort of waiting for something good to come along. I recently spent almost all that fund on a couple of well-priced rental properties. So I guess I kind of used the emergency fund as “dry tinder.”

    I really enjoy your stuff, AOF. Keep up the good work!

    1. Hey fireman thanks for the kind words I appreciate it.
      I actually think dry powder for real estate makes a lot more sense than for stocks. Since real estate requires considerable liquidity and it is a much less efficient market that needs stocks. (In other words, there are all sorts of price dislocation and demand/supply imbalances in real estate that can be exploited by someone skilful and knowledgeable enough.)

  8. Since I’m 29, I just buy when my paycheck comes in (and never sell at a loss). A dip is like equities going on sale as I’m investing over a long time horizon.

    The recent stock dip did test my resolve a bit through as I was tempted to invest some money that was in my emergency fund. I find that as time goes by and my stock holding becomes larger then my psychological need for an emergency fund is decreasing so I’ll probably halve the size of it over the next year / 18 months.


    1. Good point. I’m not a big fan of emergency funds sitting in cash. But I do have a pretty big nest egg to draw upon. ERN has a good article on why he does not have a emergency fund.

  9. In your previous post (The Macro Economy of Vermont Restaurants) you end with the following comment:

    “If I was early retiring over the next couple of years I might pare back my equity allocation simply to try and mitigate sequence of returns. I’m not sure I have the conviction to reduce my portfolio risk significantly but perhaps an additional 20% in bonds feels about right. I would then be ready to ramp up the equities as my retirement progressed.”

    Do you consider your comment above to be a “strategic allocation” or a “tactical move” (in light of this article)? These two posts seem a bit contradictory to me. And yet, as someone considering retiring this year, I am fighting this contradiction in my own mind. Care to elaborate?

    1. What a great point – you got me man! At what point does a tactical view become strategic?
      I think if I have a view on where we are in the economic cycle then that is something that evolves over weeks/months/quarters as new economic data emerges. That then informs my long term view on potential returns and the relative attractiveness of equities versus bonds. If I then factor in a strategic view on trying to mitigate sequence of return risk in the early days of drawdown then I think I can justify my comment.

      I would consider a tactical view to be informed by new data emerging day by day. That, to me, it more market noise and something I don’t want to be led by. But I don’t have a hard-and-fast definition of these two viewpoints.

      I think things can also be colored by your time horizon. If I am a twenty-something with decades of accumulation, then I probably wouldn’t bother with either of the above two viewpoints. Just get on and save come what may. But given that the early days of retirement are so critical for sequence of returns, then I am more sensitive to economic sentiment.

      Make sense? Or did I dig myself a hole there? heh heh.

      1. It would seem to me that one needs a strategy for the accumulation (FI) years, and a different strategy for the de-accumulation (RE) years. If the definition of strategy is “a plan of action or policy designed to achieve a major or overall aim” – then there is a different goal/aim between FI and RE time frames. While some (perhaps many) tactics are shared between the two strategies – addressing SORR is the key goal for RE years. As you stated in another post, SORR can bite a retiree in the ass. (Yes, SORR is present in the FI years, but most who live the life of FIRE will achieve FI more so thru saving versus compounding.)

        “Just get on and save come what may.” Yet no one ever says for the RE years “Just get on and spend come what may”.

        No doubt, de-accumulation is far more complicated than accumulation. And as your reply above infers, to best address that complication requires one to understand the times of the market. Though I would surmise that may result in one tactically timing the market.

        Sorry for droning on. As someone about to start the de-accumulation phase, I am searching for a simple, easy to execute strategy. And given the current high market valuations, your comment about increasing bonds 20% to further mitigate SORR resonated strongly with me. However, so does this article about not timing the market. I think my contradiction lies in the fact I have one foot in the FI strategy and one foot in the RE strategy. If I shift 100% to RE, then a 20% increase allocation to bonds is merely a tactical move in alignment with that strategy.

        At least I hope so….

        1. Those are thoughtful and nicely stated comments. I like how you set out the FI and RE phases as different. They might share some tactical opportunities but they could have fundamentally different strategic asset allocations.

          I think the challenge you set me is to provide clear guidance for those like yourself who are crossing from FI to RE. And, indeed, might even keep a foot in each camp for a number of years. I really need to decide where I take this blog; am I going to provide (what I consider to be) interesting noodling on a variety of FIRE topics, or give some more concrete guidance that is easy to follow, with appropriate justification.

          1. Another nice post! I think sequence of return risk (SORR) is a key question. I agree that when investing for the long term the concept of “dry powder” is pretty bad idea. It’s clear that the vast majority of long-term investors (more than 10 to 15 year horizon) are best served by being fully invested in stocks.

            However, if your near or in the first five years or so of the de-accumulation phase, SORR can be very cruel to the 100% stock portfolio. Because I’m right in that window, I’ve done quite a bit of noodling about this question at my blog.

            My view is that, in the current low bond yield environment, using cash/stocks in a barbell type strategy can be a good way to go. (Note you can allocate less to cash than you would to bonds in this strategy because cash has a strong stabilizing effect on a a portfolio.) If the stock market really tanks in the first few years of your retirement, you can use the cash as dry powder to buy the dip. As ERN points out, this can be emotionally hard to do, but it’s a good strategy in my mind for the disciplined investor. (Another note, right now I’m getting 1.5% annual interest on my “cash”, which looks pretty good next to a 5-year bond yield of 2.6% right now.)

            I’ve written dozens of pages on this, so I won’t try to provide a full defense of the cash/stock strategy for early in the retirement window. If it sounds like a crackpot idea to you, I urge you to read some of my posts before responding.

          2. Sorry – this got stuck in the spam filter! Not sure why because it’s a great reply!
            I shall have a look at your cash/stocks posts and hold my tongue!
            I actually don’t have a problem with cash as part of a strategic asset allocation. If you are nervous about equity allocation from SORR in the early years of retirement then cash is a good way to dial back that equity exposure. Nothing wrong with that. That’s a high level risk/return view; I get nervous when people are making short term tactical views by holding cash.

            Thanks for dropping by.

  10. What an experience the pension board meeting would be. If you beat them, I’d better start listening to you, right? I do have some “cash-like” $ in my 401(k), but since it’s earning ~2% I view it more as part of my bond allocation. Still, I’ll dip into it from time to time to buy some dips (always <1% of my allocation for any given “tactical” move).

    I just can’t quit playing with the fire…but I only throw in twigs, not logs.

    1. Don’t change a thing Fritz. You must be doing something right to be in the great position you are!
      Thanks for visiting.

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