If you own a stock mutual fund, you expect it to be fully invested, not sitting in cash or cash equivalents such as short-term US Treasuries. After all, you’re paying the manager to make savvy investments with your money, not just hold it for you. But today—with a recession looming, stock prices still not cheap on a historical basis and safe, generous yields available on cash—it makes sense to have a fund that keeps some cash reserves, also known as “dry powder.” Here’s why: If the economy slows and the S&P 500 revisits its bear-market lows, the cash will help cushion its downside and can be put to work when bargains start to appear. If stocks rally, the fund likely will trail the broad market, but its returns will be boosted by the recent 4% short-term Treasury yields that it can earn on its cash.

What to do: Consider investing in what David Snowball, PhD, calls the “dry powder gang.” These are highly disciplined funds with relatively low volatility, strong long-term records and a willingness to maintain large cash holdings. These funds aren’t trying to time the market by jumping in and out of stocks. Instead, they let their cash allocation build naturally when the managers can’t find investments that meet their criteria. Members of the dry powder gang now…

AMG Yacktman Fund (YACKX). Invests in large-cap value stocks. Recent cash allocation: 11%. Performance: 9.75%.*

Bruce Fund (BRUFX). Invests in value stocks of all sizes. Recent cash allocation: 28%. Performance: 7.66%.

FPA Crescent Fund (FPACX). A go-anywhere fund that holds stocks, bonds and other asset classes. Recent cash allocation: 29%. Performance: 7.21%.

*All performance figures are for 10 years annualized as of May 1, 2023.

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