Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Good common sense, there. Seems to me that there needs to be a particular distinction which never gets mentioned, but ought to be made explicit. Maybe I missed it, in that very readable article. Good links included along the way, too.
What I'm getting at is this: the wealthy can afford to hold dry powder. Those just starting out investing, or have not reached anything that could be thought of as a GOAL yet, cannot afford to hold much, if any, dry powder. If those newbies get in at an opportune time, then all the better. If, as now, the Market is riding high, dollar-cost-averaging seems the way to go, than to simply hold back and NOT invest, until--- who knows when? Eh?
As the article points out, a younger investor might comfortably remain invested 100% of the time (10 of more years away from retirement).
Using Portfolio Visualizer one can back test balance funds such as VBINX or FBALX and analyze their 3 & 5 year rolling returns back to 1994. Their 3-year rolling returns went negative twice (June 2002 - Oct 2003) and (Sept 2008 - Dec 2010). It appears a balance portfolio in retirement might want to avoid withdrawals during these types of time frames. The longest of these time frames being about 2 years. It would seem appropriate to keep two years worth of spending out of the market so that it could be spent during these negative draw down periods. Maybe more if you are strategically trying to use cash to "buy" when the market swoons.
I don't think this idea of holding "dry-powder" is a winning proposition for most. It is obviously the ultimate market timing idea which in the long run is a losing proposition by most research. Lost potential.
I do agree with the articles cash reserve and if retired or close to it, the idea of 'cash liquidity reserves', a withdrawal bucket so you don't have to sell equity funds in down markets.
Dry powder for timing entry points in a down market? I don't think it works over time.
I don’t think of it as dry powder. Fixed income is an integral part of a conservatively diversified portfolio suitable for my age, situation and risk tolerance. That said, cash and cash alternatives are pegged at 12% of portfolio with bond funds (intermediate & shorter duration) making up another 20%. So, @Derf - sounds like I’m right there with you at 32%.
Sure, under extremely oversold market conditions I’ll occasionally put a bit of it to work.
As the article points out, a younger investor might comfortably remain invested 100% of the time (10 of more years away from retirement). You're right, @bee! I'm humbly corrected.
TODAY'S results might be a useful illustration. Not a great day in the Markets, generally. Yet, with my 51% bonds and 40% stocks (the rest in "cash" held by fund managers) it worked for me: up barely on the day, but up, nevertheless. (+0.07%) I'd be below the break-even line if my PRWCX were not almost 32% of my holdings. (Up just a penny.)
"...conservatively diversified portfolio...cash and cash alternatives are pegged at 12% of portfolio..."
I agree with the use of cash or cash alternatives in a portfolio @hank. My point was, and when I hear the term "dry powder", to me that means you are holding cash for "timing" when to buy equities. That is lost opportunity cost.
@MikeM - All good points. BTW - always glad to see you posting.
Investment nomenclature changes. Go back 10-15 years and board participants talked a lot about “stashing away dry powder”, “backing up the truck” and “going all in”. Not sure what’s in vogue today. But it ain’t these.
Cash rubs a lot of people the wrong way. In its defense I’d make two points.
- Cash alternatives offer slightly better returns. I’m using TLDTX which carries a lower ER than either Price’s money market or ultra-short fund, invests in government backed paper and maintains a fairly stable value. It’s up 1.28% YTD.
- If you rebalance periodically, after a bad year for your other holdings you’d be glad to have owned even some “0 return” cash to shift into those now depressed sectors. As a % of your portfolio, cash has increased - even while returning 0%.
I think the notion that a young person should by default be 100% in stocks is fundamentally false. Individual financial circumstances vary tremendously. A young person with a new job is vulnerable to financial instability—first hired, first fired—may have a lot of student debt, may not even have a steady job but be in the “gig” economy, may need to invest more in their human capital via education to advance their career, may have too little cash for emergencies, etc. All things being equal, a young person should hold more stocks. But all things are never equal.
@LewisBraham, I took the author's "100%" to mean invested , not specifically invested "100% in stocks".
"100% invested at ones' asset allocation level" might be a better way to phrase it.
For Warren Buffet's wife that would be 90% S&P 500 and 10% ST Treasuries. I think what is not properly discussed is the concept of sequence of return risk.
Reserve assets (Cash, bonds, HELOC on your home, etc.) help mitigate sequence of return risk of market correlated assets.
"...conservatively diversified portfolio...cash and cash alternatives are pegged at 12% of portfolio..."
I agree with the use of cash or cash alternatives in a portfolio @hank. My point was, and when I hear the term "dry powder", to me that means you are holding cash for "timing" when to buy equities. That is lost opportunity cost.
Hmmm. Quite right. That always made sense to me. With mutual funds. But with single stocks, I just would not want to pay a price at current high-flying levels to get in, initially. I see not many bargains at all. One (and only one,) lately I've found is BancoMacro out of Argentina. Symbol BMA. What I came across says it's selling at a 19% discount at the moment. So, rather than my favorite Canadian banks, BMA may well be my first single-stock purchase in years, soon.
Argentina can't repay its 45 billion dollar loan to the IMF and its debt is rated CCC, with inflation around 30%.
That's important to know. Thanks for telling me, @carew388. Another prospect I just found: BBVA (Spain) but 75% of its profits comes from EM. It fully owns Bancomer, in Mexico. Right now: -25% discount, share price vs. Fair Value. (Morningstar.) Maybe this stuff is useful to someone else. ...Anyhow, I've been digging, doing my homework and my kagels. https://en.wikipedia.org/wiki/Kegel_exercise
The usual boring statement, KISS for most: know your goals and risk tolerance, select asset allocation accordingly, make minimal changes, stay the course, stay invested.
Emergency fund: after your savings pass a certain amount (for us $50K+) we no longer have cash or emergency for over 2 decades and now in retirement. Do I really need an emergency fund? not really, first I use credit cards, if I can't, I have several thousands in the bank. Beyond that I can sell my mutual funds and get the money within 2 days. Unless you buy illegal drugs or a ransom why would you have an emergency fund.
CASH: Do you really need cash, even a retiree? IMO, a retiree maybe need 3-6 months at most. Most/all retirees have a cash flow (from SS + distribution + pension + can sell something, what is so difficult to sell 3-4 times per year), in good time they can sell stocks and in bad times they can sell some bonds. Some of these bonds should be a ballast for stocks which means in market meltdown they will go up or have minimal losses.
CASH for trading: I never understood this concept and I'm a trader and not a typical investor. A typical investor have stocks+bonds. If stock go down and you want to buy more stocks, it's pretty east to sell some bonds and buy stocks, so why be in cash making almost nothing. As a trader in the last 20+ years. When I was younger I just switched from lagging funds to better performing funds. The big change came around 2010 and planning for retirement when I added max loss allowed rule to protect my portfolio. Since then, I'm in the market about 98% and invested at 99+%(never cash). Only at extreme risk I'm out.
So, what % I do have now in cash? The usual, less than 1%, after all, I don't see extreme risk for months.
Don't make it harder than it has to be. We all have different needs, goals and objectives. Do what makes you feel comfortable and able to SWAN. Even stating a certain percentage is wonky depending on the level of available assets to liabilities one is responsible for.
I hold roughly 2% in cash. I pay my monthly bills from that along with having enough to buy an individual stock that I would like to own or add to should it happen to fall into a dumpster fire for no explicable reason. It's not a big deal.
For me now I'm 1/3 of my portfolio in cash, money markets or CDs earning anywhere from .5% to 3% (lucky 5 yr cd's bought a few years ago). I'm VERY conservative, but OK with that. I don't look at the cash as an emergency fund, just a guarantee not to get crushed in the next downturn. I cannot time the market.
My wife and I maintain a HY Checking account, maintaining a balance in the $10k to $15K range. We also maintain about 10% of our taxable brokerage account in bond oefs, that have a solid history of making more interest/total return than a standard banking account, with a strong downmarket performance history. We can sell those brokerage assets quickly, and transfer them to our HY Checking Account in 2 to 3 days. We usually stay fully invested, except for those Black Swan periods, where we may go totally to cash and wait for good re-entry opportunities.
"We usually stay fully invested, except for those Black Swan periods, where we may go totally to cash and wait for good re-entry opportunities."
Serious question - Do you anticipate these Black Swan periods in advance or do you sell after the initial presumed damage is already done? The, how do you decide that the downdraft is over with and the good re-entry opportunities are there for the taking? I merely ask because I have never been really good at either end of that scenario.
Question for you...how do you know and how do you decide or put another way, when have you decided a black swan was coming and what did you do when you went totally to cash? What are your signals, technical? Wisdom/experience/gut feel?
FWIW and I am not making recommendations to anyone but I am ~ 75% cash/CD/IBonds.
Market just seems to me artificial...too much BS (balance sheet or bull sheet, use the term as you wish) of Central Banks.
Also, what is very worrisome is just talked to my sister this morning who lives in Munich, they are having terrible time with Covid, quasi-lockdown everywhere, virus mutant very bad in England, but here in the large midwest city, restaurants are packed, many not wearing masks, parties going on, "older" folks who have gotten vaccine feel invincible, folks all talking about where they are going to fly to on vacation in a few months...very concerning...but on the other hand, lot of vaccination going on too...who knows?
I just hope that we did not open up too early after Orange Man bad left office and now it is going to all be kumbaya.
Let's hope for all our sakes it all works out for the best.
” I am ~ 75% cash/CD/IBonds. Market just seems to me artificial...too much BS ...”
Hmm .. @Baseball_Fan - A few days ago you sounded downright bullish. From your April 12 post (Thread: “Bond Duration Question”) - “On a side note...just increased my holdings in Home Depot to low six figures..”
Just curious whether you own any mutual funds? Or are you 75% cash/CD/bonds and the remainder directly in stocks?
Not nit-picking. Just trying to get a read on your methods so we all can learn from you.
thanks for asking, appreciate the question as it makes me think...
I've always had the philosophy that one can hold opposing views concurrently. There is no law stating that you cannot, who says you have to pick a lane. I am inherently conservative, my parents were in Europe during WWII, saw first hand how your life can change on a dime and my Mom never liked the stock market, only CDs and MM's. My Dad was into Growth stocks, so I saw the balance of opposite views in my yute. I believe that most folks manage their monies similar to their parents as well as their eating habits etc.
I myself was an extremely aggressive investor in my early 20's going into my mid 30s then saw the baloney that starting taking place in 03, 04' etc with the housing market and the "this is contained within the real estate market"..I knew with that quote to head for the hills. Had a very minimal drawdown in my portfolio then. Haven't really trusted the markets since and really don't trust it now.
So the point of those stories is that I know I've been way too conservative but on the other hand so far I've generally kept my drawdowns to minimus and have slept fairly well at night. There are no gurantee's in life and anything can happen at any time. My whole philosophy is to limit drawdowns to a what is my own personal level which is mid single digits.
There is a part of me who thinks the markets are an absolute joke and you would be a fool to have a majority of your life savings in them and then the other side who thinks well if the CBs (central banks) are building up their BS'(balance sheets) you'd be a fool not to play along with the subsequent asset inflation.
I do hold a combo of mutual funds as well as a few individual stocks (HD, AWK, MSFT, ACN, TFX...) that I believe strongly in. Again, that is likely a things I picked up from my Dad who did that, he bought WMT stock years ago, yes, it has done well in the past 35 years and my Mom still owns it but had most of his monies in Fid Magellan, Selected American Shares, Growth mutual funds.
On the same hand I do own mutual funds, more $ than monies in indvid stonks.
PMEFX, ARTTX are some of them and lately been getting into FEVAX, no load, First Eagle US Value, likely going to get out of FPFIX, recent posting here made me recognize that I don't want to hold some of the underlying holdings of that fund.
Like most others here state, it kinda works for me, I don't recommend this to anyone else and I am just posting for entertainment value.
Mark: "Serious question - Do you anticipate these Black Swan periods in advance or do you sell after the initial presumed damage is already done? The, how do you decide that the downdraft is over with and the good re-entry opportunities are there for the taking? I merely ask because I have never been really good at either end of that scenario."
Mark, no I do not anticipate Black Swan periods. I maintain less than 10 funds in my portfolio, and monitor them very closely. When each fund reaches a stop loss point, that I have established for each given fund, I will cut my losses and go to cash. I do not know its a Black Swan, but in a Black Swan period, each fund tends to reach a stop loss point, that results in all funds being sold. I repurchase by watching momentum performance trends, looking at both short and longer performance periods, and tend to repurchase slowly, one fund at a time, until I am fully invested. I maintain a large number of watchlists, with detailed performance data, normally categorized by different M* categories. I have great familiarity with funds on my watchlists, so that the bulk of due diligence investigating has already been done when I decide its time to make a purchase.
I haven’t read everything above but I say cash is form of bonds. When I started investing in 1982 cash reserve funds were the high flyers. Of course conditions then were much different than they are now but still, cash reserves are ultra short bonds. Johnathan Clements discussed his thoughts on cash in a recent article in his Humble Dollar blog
At this point, half my bonds are termed “cash”. Another 25% are in a Stable value fund - neither true bonds or cash. Maybe I should advocate that we call all these bond like instruments “fixed income”.
I haven’t read everything above but I say cash is form of bonds. When I started investing in 1982 cash reserve funds were the high flyers. Of course conditions then were much different than they are now but still, cash reserves are ultra short bonds. Johnathan Clements discussed his thoughts on cash in a recent article in his Humble Dollar blog
At this point, half my bonds are termed “cash”. Another 25% are in a Stable value fund - neither true bonds or cash. Maybe I should advocate that we call all these bond like instruments “fixed income”.
I did and what I have done since I started investing and now at retirement. I'm fully invested at 99+%, only several thousands in cash at the bank. All my brokerage accounts have zero or close to zero in MM. I only go to cash since 2010-11 when I started planning my retirement, when I see very high risk, that happened about 2%. Since 2010-11 I started to change my asset allocation gradually from a very high % in stocks funds to mainly bond fund today.
Comments
What I'm getting at is this: the wealthy can afford to hold dry powder. Those just starting out investing, or have not reached anything that could be thought of as a GOAL yet, cannot afford to hold much, if any, dry powder. If those newbies get in at an opportune time, then all the better. If, as now, the Market is riding high, dollar-cost-averaging seems the way to go, than to simply hold back and NOT invest, until--- who knows when? Eh?
Using Portfolio Visualizer one can back test balance funds such as VBINX or FBALX and analyze their 3 & 5 year rolling returns back to 1994. Their 3-year rolling returns went negative twice (June 2002 - Oct 2003) and (Sept 2008 - Dec 2010). It appears a balance portfolio in retirement might want to avoid withdrawals during these types of time frames. The longest of these time frames being about 2 years. It would seem appropriate to keep two years worth of spending out of the market so that it could be spent during these negative draw down periods. Maybe more if you are strategically trying to use cash to "buy" when the market swoons.
PV link (click on the rolling return tab)
I do agree with the articles cash reserve and if retired or close to it, the idea of 'cash liquidity reserves', a withdrawal bucket so you don't have to sell equity funds in down markets.
Dry powder for timing entry points in a down market? I don't think it works over time.
Sure, under extremely oversold market conditions I’ll occasionally put a bit of it to work.
Investment nomenclature changes. Go back 10-15 years and board participants talked a lot about “stashing away dry powder”, “backing up the truck” and “going all in”. Not sure what’s in vogue today. But it ain’t these.
Cash rubs a lot of people the wrong way. In its defense I’d make two points.
- Cash alternatives offer slightly better returns. I’m using TLDTX which carries a lower ER than either Price’s money market or ultra-short fund, invests in government backed paper and maintains a fairly stable value. It’s up 1.28% YTD.
- If you rebalance periodically, after a bad year for your other holdings you’d be glad to have owned even some “0 return” cash to shift into those now depressed sectors. As a % of your portfolio, cash has increased - even while returning 0%.
"100% invested at ones' asset allocation level" might be a better way to phrase it.
For Warren Buffet's wife that would be 90% S&P 500 and 10% ST Treasuries. I think what is not properly discussed is the concept of sequence of return risk.
Reserve assets (Cash, bonds, HELOC on your home, etc.) help mitigate sequence of return risk of market correlated assets.
"Sequence of Return Risk" discussion thread:
https://mutualfundobserver.com/discuss/discussion/comment/133887/#Comment_133887
Another prospect I just found: BBVA (Spain) but 75% of its profits comes from EM. It fully owns Bancomer, in Mexico. Right now: -25% discount, share price vs. Fair Value. (Morningstar.) Maybe this stuff is useful to someone else. ...Anyhow, I've been digging, doing my homework and my kagels.
https://en.wikipedia.org/wiki/Kegel_exercise
Emergency fund: after your savings pass a certain amount (for us $50K+) we no longer have cash or emergency for over 2 decades and now in retirement.
Do I really need an emergency fund? not really, first I use credit cards, if I can't, I have several thousands in the bank. Beyond that I can sell my mutual funds and get the money within 2 days. Unless you buy illegal drugs or a ransom why would you have an emergency fund.
CASH: Do you really need cash, even a retiree? IMO, a retiree maybe need 3-6 months at most. Most/all retirees have a cash flow (from SS + distribution + pension + can sell something, what is so difficult to sell 3-4 times per year), in good time they can sell stocks and in bad times they can sell some bonds. Some of these bonds should be a ballast for stocks which means in market meltdown they will go up or have minimal losses.
CASH for trading: I never understood this concept and I'm a trader and not a typical investor. A typical investor have stocks+bonds. If stock go down and you want to buy more stocks, it's pretty east to sell some bonds and buy stocks, so why be in cash making almost nothing.
As a trader in the last 20+ years. When I was younger I just switched from lagging funds to better performing funds. The big change came around 2010 and planning for retirement when I added max loss allowed rule to protect my portfolio. Since then, I'm in the market about 98% and invested at 99+%(never cash). Only at extreme risk I'm out.
So, what % I do have now in cash? The usual, less than 1%, after all, I don't see extreme risk for months.
I hold roughly 2% in cash. I pay my monthly bills from that along with having enough to buy an individual stock that I would like to own or add to should it happen to fall into a dumpster fire for no explicable reason. It's not a big deal.
Serious question - Do you anticipate these Black Swan periods in advance or do you sell after the initial presumed damage is already done? The, how do you decide that the downdraft is over with and the good re-entry opportunities are there for the taking? I merely ask because I have never been really good at either end of that scenario.
Question for you...how do you know and how do you decide or put another way, when have you decided a black swan was coming and what did you do when you went totally to cash? What are your signals, technical? Wisdom/experience/gut feel?
FWIW and I am not making recommendations to anyone but I am ~ 75% cash/CD/IBonds.
Market just seems to me artificial...too much BS (balance sheet or bull sheet, use the term as you wish) of Central Banks.
Also, what is very worrisome is just talked to my sister this morning who lives in Munich, they are having terrible time with Covid, quasi-lockdown everywhere, virus mutant very bad in England, but here in the large midwest city, restaurants are packed, many not wearing masks, parties going on, "older" folks who have gotten vaccine feel invincible, folks all talking about where they are going to fly to on vacation in a few months...very concerning...but on the other hand, lot of vaccination going on too...who knows?
I just hope that we did not open up too early after Orange Man bad left office and now it is going to all be kumbaya.
Let's hope for all our sakes it all works out for the best.
Good Luck and good health to you and to all,
Baseball Fan
Just curious whether you own any mutual funds? Or are you 75% cash/CD/bonds and the remainder directly in stocks?
Not nit-picking. Just trying to get a read on your methods so we all can learn from you.
the very definition of a contradiction in terms
thanks for asking, appreciate the question as it makes me think...
I've always had the philosophy that one can hold opposing views concurrently. There is no law stating that you cannot, who says you have to pick a lane. I am inherently conservative, my parents were in Europe during WWII, saw first hand how your life can change on a dime and my Mom never liked the stock market, only CDs and MM's. My Dad was into Growth stocks, so I saw the balance of opposite views in my yute. I believe that most folks manage their monies similar to their parents as well as their eating habits etc.
I myself was an extremely aggressive investor in my early 20's going into my mid 30s then saw the baloney that starting taking place in 03, 04' etc with the housing market and the "this is contained within the real estate market"..I knew with that quote to head for the hills. Had a very minimal drawdown in my portfolio then. Haven't really trusted the markets since and really don't trust it now.
So the point of those stories is that I know I've been way too conservative but on the other hand so far I've generally kept my drawdowns to minimus and have slept fairly well at night. There are no gurantee's in life and anything can happen at any time. My whole philosophy is to limit drawdowns to a what is my own personal level which is mid single digits.
There is a part of me who thinks the markets are an absolute joke and you would be a fool to have a majority of your life savings in them and then the other side who thinks well if the CBs (central banks) are building up their BS'(balance sheets) you'd be a fool not to play along with the subsequent asset inflation.
I do hold a combo of mutual funds as well as a few individual stocks (HD, AWK, MSFT, ACN, TFX...) that I believe strongly in. Again, that is likely a things I picked up from my Dad who did that, he bought WMT stock years ago, yes, it has done well in the past 35 years and my Mom still owns it but had most of his monies in Fid Magellan, Selected American Shares, Growth mutual funds.
On the same hand I do own mutual funds, more $ than monies in indvid stonks.
PMEFX, ARTTX are some of them and lately been getting into FEVAX, no load, First Eagle US Value, likely going to get out of FPFIX, recent posting here made me recognize that I don't want to hold some of the underlying holdings of that fund.
Like most others here state, it kinda works for me, I don't recommend this to anyone else and I am just posting for entertainment value.
Good Luck and Good health to you Hank and all,
Baseball Fan
Mark, no I do not anticipate Black Swan periods. I maintain less than 10 funds in my portfolio, and monitor them very closely. When each fund reaches a stop loss point, that I have established for each given fund, I will cut my losses and go to cash. I do not know its a Black Swan, but in a Black Swan period, each fund tends to reach a stop loss point, that results in all funds being sold. I repurchase by watching momentum performance trends, looking at both short and longer performance periods, and tend to repurchase slowly, one fund at a time, until I am fully invested. I maintain a large number of watchlists, with detailed performance data, normally categorized by different M* categories. I have great familiarity with funds on my watchlists, so that the bulk of due diligence investigating has already been done when I decide its time to make a purchase.
At this point, half my bonds are termed “cash”. Another 25% are in a Stable value fund - neither true bonds or cash. Maybe I should advocate that we call all these bond like instruments “fixed income”.
What is to SWAN? That’s a new one on me.