Dry Powder

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.

Photo by Rosalyn Roy