Why I'm Keeping Dry Powder in 2026
Markets are at all-time highs. Sentiment is overwhelmingly bullish. History suggests that's exactly when discipline matters most.
~200%+
Buffett Indicator (late 2025)
~38
Shiller CAPE Ratio
Strong
Wall St. consensus (bullish)
What Buffett Himself Has Said
The Buffett Indicator divides the total market cap of U.S. stocks by GDP. In a 2001 Fortune interview, Warren Buffett called it “probably the best single measure of where valuations stand at any given moment.”
As I write this in late 2025, the indicator is well above 200%, near all-time highs. For context:
- 1At the 2000 dot-com peak, it reached around 140%.
- 2At the 2007 pre-crisis peak, it was around 105%.
- 3Buffett has suggested levels above 100-120% warrant caution.
This doesn't predict a crash. Markets can stay elevated for extended periods. But it does suggest that expected long-term returns from these levels have historically been muted.
The Shiller CAPE Tells a Similar Story
The Cyclically Adjusted Price-to-Earnings ratio (CAPE) smooths earnings over 10 years to filter out business cycle noise. Professor Robert Shiller won a Nobel Prize partly for this work.
~38
Current CAPE (late 2025)
~17
Long-term historical average
Today's CAPE is among the highest readings in history, exceeded only by the late 1990s dot-com era.
Historical pattern: Research suggests that when the CAPE has been elevated (above 25-30), subsequent 10-year returns have tended to be lower than average. This isn't a timing tool, but it does inform expectations.
When Consensus Is Strong...
As 2025 closes, Wall Street sentiment is notably bullish. Most major strategists expect positive returns in 2026. That's not inherently wrong, smart people can be right.
“When everyone is thinking the same, no one is thinking.”— Walter Lippmann
But historically, extreme consensus in either direction has sometimes preceded surprises. When expectations are uniformly positive, much of that optimism may already be reflected in prices. I find it useful to consider what happens if the consensus is wrong.
2026 Is a Midterm Election Year
Historically, midterm election years have shown a pattern worth noting. They've often been among the more volatile years in the presidential cycle:
Higher volatility
Historically observed in midterm years
Q2-Q3
When weakness has often occurred
The pattern also shows that midterm years have often ended positively after mid-year volatility. If that historical pattern repeats, the best opportunities might come during any volatility, not before it. Of course, past patterns don't guarantee future results.
How I'm Thinking About This
Note: This reflects my personal approach to my own portfolio. Your situation, goals, and risk tolerance may call for something completely different.
I'm not calling a crash or sitting in 100% cash. I'm simply being thoughtful about preparing for opportunity while staying invested.
1. Building Some Cash Gradually
Not panic selling, but selectively trimming positions that have run up significantly. I'm thinking about holding somewhat more cash than usual heading into 2026.
2. Maintaining a Watch List
Quality businesses at fair prices are rare right now. But if we get a meaningful pullback, some names could become attractive. I keep a list of what I'd consider buying at lower prices.
3. Having a Plan for Volatility
If markets decline meaningfully, I want to deploy cash in stages rather than trying to time the exact bottom. Having pre-set levels helps remove emotion from decisions.
4. Emphasizing Quality
What I own tends to be weighted toward businesses with pricing power, strong balance sheets, and sustainable dividends. These tend to hold up better in difficult markets.
The Bottom Line
I could be wrong. Markets could continue climbing. But I'd rather be prepared for opportunity than caught without the ability to act.
“Be fearful when others are greedy, and greedy when others are fearful.”— Warren Buffett
Current sentiment feels relatively optimistic to me. That's not a sell signal. It's a “be thoughtful” signal. And thoughtful means having some dry powder ready.
Sources & Further Reading
Want to Think Through Your Own Approach?
Everyone's situation is different. If you'd like to discuss how you're thinking about positioning for 2026 given your specific goals and circumstances, I'm happy to have that conversation.
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