I’ve got some dry powder set aside for a situation just like December. During a bear market (when the market drops 20%), the plan is to deploy half of it into equities. The S&P 500 fell 19.4% from September through Christmas Eve. It was chaos on CNBC. This was the big one… And I turned up my nose because it was half a percent short of a formal bear market. I was not ready to buy until that last 0.6% bled away. It didn’t hit the magical 20% number. Since this bear kiss, the S&P 500 is up 9.6%. Oops.
Eddy Elfenbein of Crossing Wall Street (great follow on Twitter) has a quick hit this morning “What if the Bear Market is Already Over?” that is a great reminder that the market doesn’t care about our arbitrary mindsets. Usually, I think about this in relation to the calendar. The market doesn’t care that one month (or year) ended and a new one began. In this case, the market doesn’t care that our benchmark for a bear market is a 20% downturn.
Did I screw up by not deploying that dry powder? It doesn’t feel great knowing that I “missed out” on a 9.6% rally (so far), but I also stayed true to my plan. Sticking with it through the financial crisis was unpleasant (until this bull market made it feel smart). Missing out on a rally feels less painful. It’s arbitrary, but I’m not going to change my trigger from 20% to 19.4%. For now, I will just have to be at peace with missing out. I will be ready when we do hit that 20% drawdown eventually.
PS: My Investment Philosophy series will continue later this week with what it means to keep a portfolio Focused.