In my last post, I shared that I have liquidated one-third of my dry powder investments that went into stocks in March-April this year. I also said at the time that if the market continued to make new highs, I would be able to divest all of my dry powder. Well, it happened sooner than I expected. As of this month, I sold off some more stocks to cash out my remaining two-third dry powder cash. Today, my dry powder coffers are full again, ready to exploit another market tantrum. Like they were in May 2019 and March 2025.
Those April investments had returned 54% in the six-month period before I divested. The stock market recovered from the post–liberation-day shock rather quickly. Though I’d made no bets on its quick recovery, it was still fascinating to see how the market climbed over its wall of worries.
Going into a market downturn, I never know how long eventual recovery would take: many months or a few years. My dry powder cash has staying power. I can keep the cash invested for however long it takes for the market to recover. See this to learn more about my dry powder investing.
I have been writing this blog since late 2017 (this was my first blog post). Over those eight years of investing, the market has gone down multiple times, as expected. And each time it went down more than 10% (five times so far), I’ve had successfully deployed my dry powder cash. Some downturns took much longer than others (for instance, the 2022 bear market). Others were shorter but deeper (like the 2020 COVID panic). Each time though I invest with the conviction that the financial crisis (or geopolitical or something else) that triggered the downturn will resolve in due course and the market will recover from it.
Below chart shows the history of the S&P 500 index from 2018. 10% or greater drawdowns are highlighted. There were five in that period. Each time it happened, I deployed a portion of my dry powder cash to take advantage of the price drops. The deeper the drawdown, the more cash I was able to invest. Recoveries usually took longer than the downturns themselves. The chart also highlights how long it took from prior peak to full price recovery. I shared a similar chart five years ago when the market had just recovered from the 2020 panic.
My dry powder stays invested through the recovery periods. I reload my cash bucket when the market completes a turnaround. What I eventually sell is not necessarily the same stocks that I had bought during the downturn. I may sell a little bit from my top 20 stocks. Or I could just skim off from the best performing ones. In the first two downturns (both in 2018), I had substantial funds in a market index fund that I gradually depleted to recover cash. Today, I don’t own any index fund or ETFs anymore.
Here’s a table that summarizes those market downturns. And how much of my dry powder I was able to deploy each time. Check out the blog links posted below the table for my thoughts during those times and what exactly I had bought then.
[1]: Portfolio Update March 2018
[2]: Investing Amid Volatility: 4Q18 Update
[3]: Breaking Out To a New High
[4]: In Anticipation of Economic Recovery
[5]: Dry Powder Investing Helps Me Stay Productive
Despite many drawdowns, the stock market has done nicely since 2017. The S&P 500 index is up about 151% since October 2017 when I first published my blog. Or about 184% if we assume dividends are reinvested. This nice performance in the face of frequent market drops should not be surprising to anyone who has studied the long-term stock market history. On the contrary, investors like me count on these multi-year gains to grow our portfolios.
This past eight-year period has been excellent for stocks. Better than average, certainly. We’ll see how the next ten years will turn out. I suspect we’ll see net growth, notwithstanding frequent hiccups and drawdowns. After all, it’s extremely rare for US stocks to ever have a negative ten-year period.
As my portfolio has grown very nicely since 2017, I have gradually increased my cash reserves accordingly. When I started, I kept about 10% cash for rainy day funds and dry powder. Today, I have 17% cash in my portfolio. It’s not just a reflection on my portfolio growth though. It’s also a nod to my growing older and getting closer to full retirement.
It pays to be methodical: I end this post with the following thought: I was just reading the 2Q letter from Bristlemoon Capital, an asset manager based in Australia. They mentioned how they had taken on a defensive posture at the beginning of the year (buying puts and keeping more cash at hand) as they were wary of the new US administration’s trade policies. But the market dived too fast in April and then recovered much faster that they’d anticipated, leaving them with available funds but missed investing opportunities.
They ended up not being able to scoop any bargains:
Coming into April 2025, we were defensively positioned… The Fund was holding an elevated level of cash in addition to index puts. Our positioning was to protect against a left-tail risk of a draconian tariff scenario, one which we felt markets were not adequately appreciating…
Our plan was to begin selling the puts and gradually deploying into the attractive opportunities we were seeing. However, the markets turned on a dime after Trump announced a 90-day pause on implementing reciprocal tariffs and we were too slow putting the Fund’s cash to work. Equities surged, and the opportunity to scoop up stocks at bargain prices rapidly diminished.
Unfortunately, we were too slow to reverse our defensive portfolio positioning in April and reluctant to chase stocks higher in May and June
Not to put them on spot here but I can’t help but wonder if my mechanical approach to investing dry powder cash is better. It certainly came out well this April. I was able to invest 17% of my dry powder cash since I didn’t wait for a perceived market bottom before I’d started investing. I also don’t carry any conviction regarding impact of any externality, geopolitical or otherwise. I keep on picking up good stocks as the market continues declining, stopping only when the market stops declining.
Hi MC
yes I have done exactly the same – maybe not at the same time – but my dry powder is now intact for the next downturn
I don’t know if you read John Mauldin – he was commenting on a recent book by Ray Dalio
How Countries go Broke – the Big Cycle. I have read some of Ray’s work and watched some of his utube videos
I havent’ read it, but I’m guessing that it has warnings about the US debt burden and the probability/timing of a collapse and restructuring at some point
Just wondering how long before the tsunami hits the US – and consequently the rest of the world
Hi Nicholas: My replenishing the dry powder cash is more of an effect of the US stock market reaching an all time high. Not because I see an imminent downturn. For all I know we could be years away from another market crisis. I don’t pay attention to macroeconomic forecasts, good or bad. Thanks!