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.
But probably just lucky.
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.
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.
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.
The Price of Being Un-invested
I saw a very interesting chart from J.P.Morgan Asset Management. Take a moment to digest it.
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.