Do you use a dry powder/tactical asset allocation strategy?

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Investor2
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Do you use a dry powder/tactical asset allocation strategy?

Post by Investor2 »

I’ve often heard experienced investors talk about keeping some cash or fixed income available as “dry powder” to be used to buy stocks on market dips – and given a five year bull market, a dip or bear market seems increasingly likely. I’m wondering what other Bogleheads are doing.

Do you use a “dry powder” strategy? If so, how do you implement it, and what are your plans given the current market?

(My allocation is 75/25 stocks/fixed (fixed is all TSP G Fund and I Bonds). I’m generally comfortable with this allocation, but would not be able to use any of the fixed to buy stocks on a dip, as the absolute dollar amount of the fixed income (combined with pension and SS) equals the amount I need for my liability matching portfolio, and I won’t touch this until I retire, probably in 2-3 years, and start making withdrawals.

I’m wondering if I should put more into fixed, not to change my long term asset allocation, but for the purpose of having funds available to buy back stocks in the near term if/when they drop. For example, move 15% of equity to fixed, and then put back into stocks on a preplanned schedule – 1/3 if stocks drop 20%, another 1/3 if drop reaches 25%, and final 1/3 if drop reaches 30%.)

Jack Bogle’s comments on this issue:

(1) From an interview with ETF.com on April 1, 2014:

Q: Five years into a relatively strong bull market . . . what's an investor to do? How do you protect returns that are in the bag and enhance future returns at this juncture?

Bogle: Well, I think that is a weapon that should be used sparingly. You're taking a gamble when you get out. . . . People aren’t going to know how to do that—it’s market timing. I’d say, never be out of the stock market. . . . But maybe you can trim taking 15 percentage points off the table or something like that.

Q: You mean 15 percentage points of straight equity exposure, for example?

Bogle: Yes.”

http://www.etf.com/sections/features/21 ... =1&start=4

(2) From Mr. Bogle’s book, Common Sense on Mutual Funds (2000 & 2010 editions):

“There is a third option . . . [that] does not abandon the “stay the course” principle, but allows for a midcourse correction if stormy weather threatens . . . This policy is referred to as tactical asset allocation. It is an opportunistic, transitory, aggressive policy that . . . may result in marginally better long-term returns. . . . f the strategy is used at all, [it] should . . . be used only at the margin . . . [L]imit any change to no more than 15 percentage points [in your equity position].”
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Re: Do you use a dry powder/tactical asset allocation strate

Post by livesoft »

I have an allocation to fixed income which include total US Bond index, short-term corporate bond index, and TIAA traditional.

All of this is wet powder that can be used to opportunistcally rebalance temporarily into equities. Typically, I will sell a short-term bond fund ETF shares and buy an equity ETF, but I may also simply exchange from a bond index fund into an equity index fund. There is probably no reason to move than 5% of total portfolio value whenever such "rebalancing" is called for.

And days for "rebalancing" are noted in real-time on the forum, so that everyone can participate if they wish to.

You should do some checking of history and tell us when stock indexes dropped 20%, 25%, and 30% as you noted in your opening post as trigger points. You will find that you will be waiting a long time if you need numbers like that to make a move. And that's a long time to wait in "dry powder". Now if you had written 5% and 10% drops, then you may have a chance, but you will be missing out on smaller drops that are very profitable, too.

So far in 2014, this strategy has performed about 17% better than similar funds of the same asset allocation. (Note "hype" statement, please think carefully about it.)
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Re: Do you use a dry powder/tactical asset allocation strate

Post by grabiner »

I don't have dry powder as such, but I rebalance regularly. I made a stock purchase in October 2008, near the market bottom, because the falling market had taken me from my target 10% bond allocation to 14%, so I sold bonds to buy stock.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by freddie »

~20% drops happen every 5 or 6 years historically. For example since 2000 we have had 5 of them. Now looking back we tend to group them together (2000-2002 is thought of one big decline rather than 2 bear markets with a 20% rally in between. Same thing with 2007-2009) or miss them (how many people remember that 19% decline in 2011 when talking about the length our our current rally)? Of course there are also 10+ year periods when they don't happen.

And for fun, you always need to run your timing systems on 9/17/29 til 12/31/42 . There was basically a bear market and bull market every year:)
livesoft wrote:I have an allocation to fixed income which include total US Bond index, short-term corporate bond index, and TIAA traditional.

All of this is wet powder that can be used to opportunistcally rebalance temporarily into equities. Typically, I will sell a short-term bond fund ETF shares and buy an equity ETF, but I may also simply exchange from a bond index fund into an equity index fund. There is probably no reason to move than 5% of total portfolio value whenever such "rebalancing" is called for.

And days for "rebalancing" are noted in real-time on the forum, so that everyone can participate if they wish to.

You should do some checking of history and tell us when stock indexes dropped 20%, 25%, and 30% as you noted in your opening post as trigger points. You will find that you will be waiting a long time if you need numbers like that to make a move. And that's a long time to wait in "dry powder". Now if you had written 5% and 10% drops, then you may have a chance, but you will be missing out on smaller drops that are very profitable, too.

So far in 2014, this strategy has performed about 17% better than similar funds of the same asset allocation. (Note "hype" statement, please think carefully about it.)
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Re: Do you use a dry powder/tactical asset allocation strate

Post by tfb »

Investor2 wrote:Do you use a “dry powder” strategy? If so, how do you implement it, and what are your plans given the current market?
I do, by increasing equity exposure in bear markets. I maintain a normal allocation in the current market.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by dl7848 »

A few possibiities, techniques-wise:

1. The balancing band approach (grabiner). Reblance when your desired allocations get out of whack

2. The percentage approach. Rebalance every 10% move (or some similar number)

3. The chart-based approach. Figure out reasonable price locations to rebalance based on conext of where the market is and has been.

4. Periodic profit-taking. Sell small amounts incrementally to lock in profit when the environment seems unusually uncertain.

I've used all of these approaches at one time or another.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by LH »

Oh yeah

Dry powder

You hold cash, until prices are "low" then you buy.

You win by this simple tactical maneuver of timing the market!

You don't even have to do it yourself....

As there is the famous, dry powder mutual fund that takes this moronically easy trick, applies it, and beats passive index finds consistently.....

It's ticker is...... Hmmmmm.....

Well....

I guess no mutual fund like that exists for some reason


I wonder why?
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Re: Do you use a dry powder/tactical asset allocation strate

Post by Waba »

LH wrote: As there is the famous, dry powder mutual fund that takes this moronically easy trick, applies it, and beats passive index finds consistently.....

It's ticker is...... Hmmmmm.....
FPACX? 41% in cash as of 12/31/2013, 9.88% annual return over last 15 year
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Re: Do you use a dry powder/tactical asset allocation strate

Post by cjking »

I believe in varying my asset allocation according to how attractive prices are, am willing to be anywhere between 0% and 100% equities depending on valuations, but I don't agree with the "dry powder" idea. Equities can be expensive but still have higher expected returns than cash, and this could persist for long enough that the lost returns from sitting on the side-lines outweigh any benefit from buying cheap. In fact there is no guarantee that the day one can buy cheap will ever arrive. I weight towards the best assets that are available at any given time, but I don't believe in timing.

(If I were holding 0% equities, my money might be in property or corporate bonds. Equities can become so expensive that they cease to be the asset class with the highest expected return.)
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Re: Do you use a dry powder/tactical asset allocation strate

Post by nisiprius »

I am skeptical of "ideas" that have snappy short completely irrelevant analogies attached to them. They are sort of mind-numbing things that can be quickly tossed in in a place where a reason ought to do. "Why are you doing this?" " 'Because' it's my dry powder." It sounds like a reason, but it isn't.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by TheTimeLord »

I have an evolving strategy where I monitor not only my AA but the actual dollar amount of equity exposure I have. At the moment I am exposed as I want to be so I have a fairly large amount of dry powder. But I don't know if I would call it a dry powder strategy. Other people probably do they same thing I am doing by changing their AA to increase Bond holdings. I may eventually to that by if I did that would mean I would change my AA again if market conditions changed. Maybe I am just being wishy washy or trying to giving myself the illusion of control.
Last edited by TheTimeLord on Mon Apr 21, 2014 8:06 am, edited 1 time in total.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by IlliniDave »

I don't keep any sort of "dry powder" stash. I think along the lines of the Bogle items you included. I typically direct new money away from whatever has been performing best. I'm not against modifying my allocation slightly if it seems reasonably prudent to do so. I do keep an eye on valuations and if they rise to a certain level it is quite likely I'll adjust equities downward by 10% or so. I would rebalance into a bear market, although I'm not sure if I would overshoot or not.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by magneto »

Investor2 wrote:
Do you use a “dry powder” strategy? If so, how do you implement it, and what are your plans given the current market?

(My allocation is 75/25 stocks/fixed (fixed is all TSP G Fund and I Bonds). I’m generally comfortable with this allocation, but would not be able to use any of the fixed to buy stocks on a dip, as the absolute dollar amount of the fixed income (combined with pension and SS) equals the amount I need for my liability matching portfolio, and I won’t touch this until I retire, probably in 2-3 years, and start making withdrawals.
75% stock might be considered high within 2-3 years of retirement, even with fixed, pension and SS matching liabilites. Would you feel lost opportunity regret if stocks droop 40- 50% and stay down for a while, or could you ride out knowing that the book cost of the stocks was already favourable?
No rebalancing fixed income funds to hand is unusual.

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Re: Do you use a dry powder/tactical asset allocation strate

Post by dl7848 »

nisiprius wrote:I am skeptical of "ideas" that have snappy short completely irrelevant analogies attached to them. They are sort of mind-numbing things that can be quickly tossed in in a place where a reason ought to do. "Why are you doing this?" " 'Because' it's my dry powder." It sounds like a reason, but it isn't.
I believe "dry powder" is a trader's term. "Cash reserve" might be the equivalent for an investor. Just because a hokey term may be used doesn't mean it isn't a valid concept. From my perspective, anything that keeps an investor mostly in the market is beneficial. If holding some dry powder or cash reserve helps them psychologically to keep most of their money in the market, I think it's a winner. Too often, investors are all or nothing. Either they're totally in the market or they are not. Many people don't have the constitution to be totally in the market, so some sort of compromise works for them.

Another consideration is that many people don't yet have their optimal or desired allocation. They could have lump-summed in, but that is not an approach that works for many. Alternatively, they can DCA, but they need some cash reserve/dry powder (or a continuous cash flow as from employment income) to do that. They gradually build to their allocation using the reserved or new cash. The DCA-ing can either be a true DCA, where money is allocated each month, or it can be a periodic one. If a periodic one, some investors prefer an "opportunistic" approach, believing deploying their cash on a dip or correction is better than deploying an equal amount every month. All that matters in the end is that they find an approach that works for them and that keeps them mostly in the market.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by livesoft »

dl7848 wrote:Too often, investors are all or nothing. Either they're totally in the market or they are not. Many people don't have the constitution to be totally in the market, so some sort of compromise works for them.
That sounds great, but I don't believe it. I think very few "investors are all or nothing". That is, I don't think that occurs often and certainly not too often. But maybe you have a good article that I can read about that. Thanks!
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Re: Do you use a dry powder/tactical asset allocation strate

Post by dl7848 »

livesoft wrote:
dl7848 wrote:Too often, investors are all or nothing. Either they're totally in the market or they are not. Many people don't have the constitution to be totally in the market, so some sort of compromise works for them.
That sounds great, but I don't believe it. I think very few "investors are all or nothing". That is, I don't think that occurs often and certainly not too often. But maybe you have a good article that I can read about that. Thanks!
Just to clarify and also correct myself, by totally in the market, I mean they also have bond funds. So I'm really only talking about their equity portion. And it's been my observation, from reading a lot of investment boards, that many investors start in an "all-in" mode with respect to their equity allocation. That is because greed is what gets them in the market initially. They soon find their chosen equity allocation is uncomfortable, so they look for other strategies. "All or nothing" was probably the wrong term, however, since most people (that I've observed) who are scared out of the market do keep part of their equity allocation. So yes, I'll agree with you that most people probably have some equity allocation, though at one point in time, they started with a full allocaiton.

I suspect this same phenomenon is, or may start occuring, with investor's bond allocations as well, once interest rates rise. Right now, investors who haven't been scared away by all the bond-bear scaremongering are probably keeping to their allocation, although perhaps lightening up duration-wise. They may eventually find they no longer want their current bond allocation if they find both equities AND bonds going down.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by livesoft »

Thanks for the clarification.

My impression is that most investors simply contribute to 401(k) or 403(b) plan at work if available and never look at what is going on in those accounts and never change a thing. It is rare for an investor to use an internet forum or to talk to anyone about their investments. They might get some news from newspapers or TV, but I think they rarely act on the news.

Here are some links to read:
https://personal.vanguard.com/pdf/s801.pdf (most investors shot par …)
https://www.tiaa-cref.org/public/about/ ... se474.html
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Re: Do you use a dry powder/tactical asset allocation strate

Post by ray.james »

I don't have any certain strategy but did think about it. If P/E is under 14 due to market decline...I will route my new money to that stock/asset class only, and may tilt by 5-10% to it, at under adjusted P/E 11 levels. I don't base on market drops. The only asset class right now at low levels is EM, but my plan doesn't have a special allocation for it. I call this, "Buy one, get one" scheme :)

My plan has only 4 equity classes -
Large,
small value,
International large value,
international mid+small cap.

Because of 401k choices etc..I am actually in vanguard target retirement, ILV, VSS, in that order. None of these asset classes went that low in 4 years.

Ofcourse, rebalance on top to desired allocation once per year. Because of TR fund being the 80% of my portfolio, never needed that too.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by dl7848 »

livesoft wrote:Thanks for the clarification.

My impression is that most investors simply contribute to 401(k) or 403(b) plan at work if available and never look at what is going on in those accounts and never change a thing. It is rare for an investor to use an internet forum or to talk to anyone about their investments. They might get some news from newspapers or TV, but I think they rarely act on the news.
Yeah, I'll have to clarify my clarification. I'm not talking about people who have their 401K's on autopilot and don't look at their portfolios. I'm talking about people who are either: (1) concerned about making money (high greed factor) , (2) have looked at their portfolio during bear markets/crashes and have suddenly become interested in their portfolio, (3) are looking towards retirement and are forced to look at their portfolio, or (4) are in retirement and are actively monitoring their investments to make sure their longevity expectations are well covered. These are the four types of investors (there are probably more) who normally post on forums and are succeptible to what they read -- either in terms of news or portfolio recommendatons by other posters. Thay all count when we talk about "market participants" and their actions often reflect the crowd when it comes to selling panics and such. The diehard (opposite of livesoft ;)) buy-and-hold investors don't move the market , except for their DCA-ing and rebalancing, and so I'm not even sure if it's worth counting them in all of this. (Since I don't even remember what my initial point was, I'll stop now. :D)
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Re: Do you use a dry powder/tactical asset allocation strate

Post by stoneblasters »

I have found value averaging helpful to create a fund of "dry powder". I have put very little money into equities in the last 5 years and that cash is piling up in a high interest savings account. Getting itchy waiting for the market to crash to deploy those funds. The trick is to be disciplined enough not to spend that money on other stuff like real estate etc.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by Investor2 »

livesoft wrote:I have an allocation to fixed income . . . All of this is wet powder that can be used to opportunistcally rebalance temporarily into equities. Typically, I will sell a short-term bond fund ETF shares and buy an equity ETF, but I may also simply exchange from a bond index fund into an equity index fund. There is probably no reason to move than 5% of total portfolio value whenever such "rebalancing" is called for.
Can you say more about how you do this in practice? For example, do you use a set percent, such as 5%, and say whenever a particular stock index you hold drops by 5% you temporarily make up the difference from fixed, and when it recovers you sell some of that equity fund and return fixed to previous balance? What do you do if the market keeps dropping - just keep moving more and more money from fixed into that stock fund as it falls - say another infusion on every 5% drop on the way down?
livesoft wrote:And days for "rebalancing" are noted in real-time on the forum, so that everyone can participate if they wish to.
You're joking . . . right . . . ?
grabiner wrote:I don't have dry powder as such, but I rebalance regularly. I made a stock purchase in October 2008, near the market bottom, because the falling market had taken me from my target 10% bond allocation to 14%, so I sold bonds to buy stock.
What rebalancing triggers do you use? I know a lot of investors rebalance once a year, but it sounds like you do so more often, and may effectively be doing something similar to what livesoft describes above.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by abuss368 »

I rebalance as needed. Our bond position, combined with new funds, allows us to do this. The bonds provide safety and income.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by livesoft »

Investor2 wrote:
livesoft wrote:And days for "rebalancing" are noted in real-time on the forum, so that everyone can participate if they wish to.
You're joking . . . right . . . ?
I am not joking about this. You need to read more posts on the forum that explain all this. May I suggest you search on "livesoft" and "RBD" together? :)

Here's a thread of "real-time": http://www.bogleheads.org/forum/viewtop ... &p=1748564
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Re: Do you use a dry powder/tactical asset allocation strate

Post by Investor2 »

livesoft wrote:You should do some checking of history and tell us when stock indexes dropped 20%, 25%, and 30% as you noted in your opening post as trigger points. You will find that you will be waiting a long time if you need numbers like that to make a move. And that's a long time to wait in "dry powder". Now if you had written 5% and 10% drops, then you may have a chance, but you will be missing out on smaller drops that are very profitable, too.
freddie wrote:~20% drops happen every 5 or 6 years historically. For example since 2000 we have had 5 of them. Now looking back we tend to group them together (2000-2002 is thought of one big decline rather than 2 bear markets with a 20% rally in between. Same thing with 2007-2009) or miss them (how many people remember that 19% decline in 2011 when talking about the length our our current rally)? Of course there are also 10+ year periods when they don't happen.
Thanks for pointing this out. I did check and it seems these major drops, especially in the 25% or 30% range, are a lot less frequent than I imagined, so not good triggers to use.
nisiprius wrote:I am skeptical of "ideas" that have snappy short completely irrelevant analogies attached to them. They are sort of mind-numbing things that can be quickly tossed in in a place where a reason ought to do. "Why are you doing this?" " 'Because' it's my dry powder." It sounds like a reason, but it isn't.
I actually don't like the term "dry powder" either . . .
IlliniDave wrote:I don't keep any sort of "dry powder" stash. . . . I typically direct new money away from whatever has been performing best. I'm not against modifying my allocation slightly if it seems reasonably prudent to do so. I do keep an eye on valuations and if they rise to a certain level it is quite likely I'll adjust equities downward by 10% or so. I would rebalance into a bear market, although I'm not sure if I would overshoot or not.
Directing new money away from what has done best would be another way to address the issue. I'm planning to work for another couple of years, and will be investing around $50,000 in new money each year, so this could work. The overall approach you describe sounds reasonable and prudent, thanks for sharing this.
magneto wrote:75% stock might be considered high within 2-3 years of retirement, even with fixed, pension and SS matching liabilites. . . .No rebalancing fixed income funds to hand is unusual.
Yes, my real problem may be that I still have a bit more in stocks than I'm really comfortable with this close to retirement. I was 100% stocks for many years (not fun during 2008-09) and started moving into fixed over the last 2 years, much of it towards the end of last year. I've now got enough in fixed for liability matching portfolio (will use to supplement pension for first 10 years of retirement before taking SS at 70), but maybe I need a bit more in fixed so I can also do traditional rebalancing without threatening the LMP (which I value highly as knowing it's there relieves stress and helps me sleep well :happy)
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Re: Do you use a dry powder/tactical asset allocation strate

Post by leonard »

Waba wrote:
LH wrote: As there is the famous, dry powder mutual fund that takes this moronically easy trick, applies it, and beats passive index finds consistently.....

It's ticker is...... Hmmmmm.....
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Re: Do you use a dry powder/tactical asset allocation strate

Post by LH »

Waba wrote:
LH wrote: As there is the famous, dry powder mutual fund that takes this moronically easy trick, applies it, and beats passive index finds consistently.....

It's ticker is...... Hmmmmm.....
FPACX? 41% in cash as of 12/31/2013, 9.88% annual return over last 15 year
?

Just to be clear, are you saying fpacx, employs a strategy like the op???

Or are you just pointing out ex post, that funds do beat passive indexing like dart throwing monkeys can?
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Re: Do you use a dry powder/tactical asset allocation strate

Post by Dandy »

Oh my Mr Bogle kind of endorsed market timing in some circumstances but not for everyone and maybe limited to 15% of equity allocation. Once again he is less dogmatic than some of his most ardent followers.

I focus on the equity vs fixed income allocation. I do have a target for "safe" liquid assets of 10% so I always have some "dry powder". It isn't for market timing it is part of my investment plan. When equities are very much outperforming, like in 2013, I periodically take money out of equities. When equities have 3 or 4 days of getting hammered I may use some fixed income to buy equities. These are never big moves percentagewise or dollar wise. Within my bands of 5% I feel free to make minor moves when the market seems overly giddy or depressed. I try not to let my investment get to the edge of the band.

This approach goes for sub allocations like REITS or International - if they are getting hammered I might buy some earlier than my bands indicate. As much of my dividends and cap gains are directed to money market there is usually some dry powder to allocate - why not buy when the sub allocation has been hammered even if it is within your band?

You might describe the approach as limited market timing within the bands. In 2013 I made about 4 of these type moves and that was a busy year.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by nedsaid »

I do not use a dry powder strategy. My money market funds from selling stock mutual funds in 2000 eventually all went into bond funds. I put the money funds into a investment grade intermediate term bond fund, a TIPS fund, and an International Bond fund. At my age, my rebalancing is just one way, from stocks to bonds.

What I have done is look for rebalancing opportunities. I try to buy things if I think they are on sale. I have posted about this several times and don't want to repeat it all here. The main thing is that I made my moves at the margins, cautiously, and with a lot of thought beforehand. So I have done a bit of tactical asset allocation. Or I will direct new money into asset classes that haven't done well recently.

I have been cautious in whatever I have done and not made dramatic moves. One reason being is that I might be wrong. If I move slowly, I will only be a bit wrong rather than very wrong. I view an investment portfolio as a very large ship that turns slowly.

Conceptually, the ideas of dry powder and tactical asset allocation are easy to understand. The problem is that it is hard to get the timing right. For example, you might be right but too early. Or way too early. If you are right too early, you might have been better off doing nothing. What I do is keep an eye on valuations best I can, make cautious moves, and hope that I am right.
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Re: Do you use a dry powder/tactical asset allocation strate

Post by Waba »

LH wrote:Just to be clear, are you saying fpacx, employs a strategy like the op???

Or are you just pointing out ex post, that funds do beat passive indexing like dart throwing monkeys can?
I'm saying fpacx employs a dry powder strategy. That's probably where the resemblance ends, I doubt the rest of their strategy involves buying low cost index funds.

I'm also pointing out ex post that this single active fund had pretty good returns over long periods in the past.

I'm not saying anything about any other active funds, especially not anything about those with managers that predicted market crashes in 2010, 2011, 2012 and 2013. :wink:
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TheTimeLord
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Re: Do you use a dry powder/tactical asset allocation strate

Post by TheTimeLord »

LH wrote:Oh yeah

Dry powder

You hold cash, until prices are "low" then you buy.

You win by this simple tactical maneuver of timing the market!

You don't even have to do it yourself....

As there is the famous, dry powder mutual fund that takes this moronically easy trick, applies it, and beats passive index finds consistently.....

It's ticker is...... Hmmmmm.....

Well....

I guess no mutual fund like that exists for some reason


I wonder why?
Because people want action not one move every couple years or so. The discipline required is really quite high.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
Buddtholomew
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Re: Do you use a dry powder/tactical asset allocation strate

Post by Buddtholomew »

If one considers all investments as part of a single portfolio, then cash reserves are short-duration bond investments that should be factored into their fixed income allocation. Investors that adopt a "dry-powder" approach should realize that their "true" AA is equity / bonds + cash reserves.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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