Robot Monster wrote: ↑Thu May 28, 2020 2:13 pm
I personally set aside some dry powder, have been watching in dismay the seemingly unstoppable stock market rally, and have been asking myself whatever shall I do with all this cash I so brilliantly set aside. If you're also in the "dry powder club" I thought it would be nice if we could all get together and commiserate a bit.
So, what is your dry powder strategy? What's stopping you from deploying, taking that brave dive back in (or at least tiptoeing slowly back in, dollar cost averaging style)?
Here's what's stopping me: Warren Buffett. Yes, Warren Buffett, and the mountain of cash he has Berkshire sitting on. “The cash position isn’t that huge when I look at the worst-case possibilities,” he said during Berkshire’s virtual shareholder meeting earlier this month. I ask myself, why shouldn't I keep my powder dry if he's basically doing the same.
I also ask myself if I'm just grasping for reasons to double down on my own stupidity.
I would over rebalance my portfolio and do aggressively. This is something like this:
If there was a drop like 20% on a $100,000 portfolio of 60/40, the $60,000/$40,000 becomes $48,000/$40,000; in order to rebalance, I would have to divert $4800 to stocks. However, divert triple this (in theory, you could do any multiple greater to 1); so it becomes $62400/$25600, now a 70.9%/29.1% split. Set caps for a maximum/minimum (say 80/20 maximum and 40/60 minimum). New cash is invested at 60/40 to help neutralize it over time.
The more aggressive the over rebalance, the wider the bounds needed. It will guarantee that you actually deploy dry powder systematically, as well as build it back up. For riskier portfolios, you could set say 60/40 as the minimum; you can also set the neutralizing portfolio to be also the minimum as well. It all depends on minimum and maximum risk desired. It avoids market timing, as well as satisfy the "value" desire to use "dry powder".
As far as where to hold "dry powder", just hold it in shorter term bonds but not too short (duration of 3-5 years). No sense being too conservative. Those bonds not subject to this should be longer duration to add duration risk back into the portfolio; you could also do the same with over rebalancing into long-term bonds, but that is a non-trivial exercise.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.