“Put your trust in God, my boys, and keep your powder dry!”

Advice attributed to Oliver Cromwell, in the poem “Oliver’s Advice” (1834)

Here are three simple truths:

1. Owning stocks makes sense because, over the long run, returns on stocks far outstrip returns on other liquid, publicly accessible asset classes. Over the past 90 years, large cap stocks have returned 10% a year while government bonds have made 5-6%.

   	S&P 500 (inc. dividends)	US small cap	3-month T-bill (aka cash)	10 yr Treasury bond	Baa corporate bond	Real Estate	Gold
   1928-2024	9.94%	11.70	3.31	4.50	6.62	4.23	5.12
   96-year portfolio	$13.9 M	$75.4 M	$23,700	$75,230	$554,000	$56,000	$132,000

   See? As long as your retirement is at least 96 years off, it’s silly to put your money anywhere other than common stocks. For those of us with a time horizon shorter than 96 years, though, there’s a second truth to cope with.

2. Owning stocks doesn’t always make sense because the price of higher long-term returns is higher immediate volatility. That’s because stocks are more exciting than bonds. Frankly, no normal human ever said, “Yup, I got me some 30-year Ginnie Mae jumbos with a coupon of 3.5%” with nearly the same visceral delight as “yup, I got into Google at the IPO.” Maaaagic! That desire to own magic often enough leads investors to spend hundreds of dollars to buy shares that are earning just pennies a year. Good news leads to excitement, excitement leads to a desire to own more, that desire leads to a bidding war for shares, which leads to a soaring stock price, which leads to more bidding … and, eventually, a head-first tumble into a black hole.

   Young investors, inured to flash crashes and three-month bear markets, might not immediately recognize how deep that hole can be. Here’s a reminder.

   Maximum drawdown and recovery times, 1960-2025

   Lipper Category	APR (percent)	MAXDD (percent)	Recovery Time months
   Global Multi-Cap Growth	11	-76.6	233
   Multi-Cap Core	8.2	-65.1	141
   Small-Cap Core	10.3	-56.6	125
   Mid-Cap Growth	9.8	-60.3	114
   Global Large-Cap Core	8.4	-54.9	74
   Multi-Cap Growth	10.3	-51.2	73
   Global Multi-Cap Value	11.3	-56.7	71
   Multi-Cap Value	9.8	-53.8	71
   Large-Cap Core	10.3	-52.5	70

   Source: MFOPremium.com fund screener, Lipper Global Datafeed

   How do you read that chart? First, the good news: if you had invested in the average global multi-cap growth fund and held it since 1960, you would have earned 11% per year on your investment. If you had held it. The challenge to holding all that time is that you would have suffered one catastrophic drawdown in which you lost 76.6% of your portfolio … and you did not fully recover for nineteen-and-a-half years. Even the supposed happy place – the highly liquid companies of the S&P 500 – has cost its investors 52.5% at one fell swoop and left them underwater for just short of six years.

3. Investors will be more rewarded for caution than boldness just now. As of March 2025, Warren Buffett’s Berkshire Hathaway holds a record $334 billion in cash, which represents approximately 29% of its total assets. This is the highest proportion of cash relative to total assets that Berkshire has maintained in decades, surpassing even previous high levels, such as the late 2000s before the financial crisis.

   Why might that be?

   • by some measures, the market remains substantially overpriced (its 10-year CAPE p/e ratio has been hovering, even after the recent correction, at the second-highest level in 125 years);
   • the returns on Treasury bonds and bills are substantial and likely to remain so, which creates real competition for the stock market and depresses returns;
   • market research firms like the Leuthold Group warn, “The message of the market looks increasingly recessionary” with “the job market on the brink” (3/9/2025) with Mark Zandi of Moody’s placing the odds of a recession this year at 40% (3/31/2025) and Goldman Sachs estimating 35% (3/31/2025);
   • the government, which already pays $1 trillion/year in interest on the national debt, will need to refinance $9 trillion in Treasury bonds in 2025 (Invenomic Capital Mgt, 3/2025) at rates generally higher than the current bonds, which adds to both the debt and political turmoil; and,
   • both Mr. Trump’s tariffs (which the Wall Street Journal’s editorial board decry as a $6 trillion tax (3/31/2025)) and their chaotic, impulsive, and ill-considered launch, pause, reconfiguration, and relaunch, trigger fears of a global recession and reordering of alliances that might marginalize the US. You’ll likely have heard about, or soon will, the CRINK nations – China, Russia, Iran, and North Korea – which form a loose anti-US alliance, both in the markets (China holds $700 billion in Treasury bonds) and in cyberspace.

The Secretary of the Treasury has opined that “I’m not worried about the markets”(3/17/2025). Others are, which is reflected in multi-year lows in consumer confidence and a $5 trillion drop in the stock market over three weeks from late February to mid-March. That drop occurred before any actual economic effects of tariffs were seen, apparently reflecting deepening anxiety among investors.

It is entirely possible that a bear market triggered this year might continue to haunt portfolios until the early 2030s. That is not a prediction; that’s a risk factor to take into account in your portfolio design.

One reasonable conclusion, if you accept the arguments above, is that you should rely on stock managers who are not wedded to stocks. When we enter a period when owning stocks makes less sense, then your manager should be free to … well, own less stock. There are at least three ways of doing that: making bets that the market or particular sectors or securities will fall (long/short equity), shifting assets from overvalued asset classes to undervalued ones (flexible portfolios) or selling stocks as they become overvalued and holding the proceeds in cash until stocks become undervalued again (absolute value investing). Any of the three strategies can work, though the first two tend to be expensive and complicated.

So why are long/short and flexible portfolios vastly more popular with investors than straightforward absolute value investing? Two reasons:

1. They’re sexy. It’s almost like being invested in a hedge fund which, despite outrageous expenses, illiquidity, frequent closures, and deplorable performance, is where all the Cool Kids hang out.
2. You demand managers that do something! (Even if it’s something stupid). Batters who swing at the first pitch, and every pitch thereafter, are exciting. They may go down, but they go down in glory. Batters who wait for a fat pitch, watching balls and marginal strikes go by, are boring. They may get solid hits, but fans become impatient and begin screaming, “we’re not paying you to stand there, swing!” As the season goes on, batters feel the pressure to produce and end up swinging at more and more bad pitches.

In The Dry Powder Gang, Revisited (May 2016), we concluded:

being fully invested in stocks all the time is a bad idea. Allowing greed and fear, alternately, to set your market exposure is a worse idea. Believing that you, personally, are magically immune from those first two observations is the worst idea of all.

You should invest in stocks only when you’ll be richly repaid for the astronomical volatility you might be exposed to. Timing in and out of “the market” is, for most of us, far less reliable and far less rewarding than finding a manager who is disciplined and who is willing to sacrifice assets rather than sacrifice you. The half-dozen teams listed above have demonstrated that they deserve your attention, especially now.

In light of this, we identified the small handful of funds that seem particularly compelling just now: funds with a track record of success and the “dry powder,” or cash on hand, to pursue more.

How we screened funds

Our highest conviction recommendations are generally drawn from the ranks of the Great Owl funds. These are funds that have produced top quintile risk-adjusted returns (i.e., they beat at least 80% of the peers in risk-adjusted returns) over the past 3-, 5-, 10- and 20-year periods (i.e., they get it right consistently). To that screen, we added a requirement that the folks currently hold substantial dry powder: cash or short-term bonds that can buffer a portfolio in a bad market and provide liquidity to grab bargains when they finally present themselves.

In each case, we compared each fund’s five-year record with that of its Lipper peer group. Wherever a fund outperformed its peers, we colored the corresponding cell blue. We provide the fund’s five-year annual returns, followed by two risk measures – its maximum drawdown or loss in the past five years and its performance in bear market months – followed by data on the fund’s cash, size, age, and expenses.

You’ll note that the expenses tend to be higher than average (with FPA Crescent being a distinguished exception) both because these funds are, on average, small and the group expense average tends to be depressed by large funds charged between zero (in Fidelity’s case) and five or six basis points (in the case of my largest passive funds and ETFs).

Five-year record, Great Owl Funds with substantial dry powder

Source: MFOPremium.com fund screener, Lipper Global Datafeed

The strange and wonderful case of cash at PIMCO

The PIMCO funds are quite good and generally quite good at risk management. Their cash / dry powder is flagged as “n/a” or “not applicable” here because the strategies use a bunch of hedging strategies that lead them to report huge cash piles, plus being more than 100% in bonds plus owning stocks.

Funds one step down

The threshold for the Great Owl group is incredibly challenging: at the top, all the time. By definition, Great Owls have five-star MFO ratings. A handful of other cash-rich funds that did not quite reach the Great Owl threshold also have powerful attractions. Highlights of that list follow.

Five-year record, MFO five-star funds with substantial dry powder

Bottom line

The demand for a fully invested portfolio forces managers to buy stocks they don’t want to own. For most funds, cash sits at 1%, even when the managers need to squint hard to justify what they’re buying. Judged by reasonable measures (risk-adjusted returns) over reasonable periods, you are better served by portfolios without fillers and by the sorts of managers we characterized as the “we’ve got your back” guys. Go check them out. The clock is ticking, and you really don’t do your best work in the midst of a panic.