Dry powder in investment terms means having a source of funds ready to move at a moments notice. The etymology, for those who care, seems to come from the use of gun powder in battle, and perhaps was first heard when used by Oliver Cromwell. A lot of financial pundits promote the concept of dry powder, but one thing that I wonder, is can it still be considered worth the price or not, when we live in a time of ZIRP, zero interest rate policy?
Accumulation vs Retention stage?
You might hear about savvy and wealthy investors like Warren Buffet who hoard cash ready to pounce on a bargain deal. These guys have dry powder. But by the same token, you might also have been told that attempting to time the market, or waiting on the sidelines for a buying dip isn’t a good idea… so what gives?
Dry powder is, essentially timing the market. You hold back some, or all of your money in order to pull the trigger when an opportunity arises. But being out has consequences. If you’re in an economic environment where you’re being paid a 7% return on fixed income, you can see that waiting out (in short duration bond funds) isn’t nearly as harmful as waiting out with 1% or lower returns. For those of you still at the accumulation stage, you have to wonder whether staying out is going to harm your long term plan or not.
Dry powder creates opportunities
Without a doubt, being able to invest at a moments notice creates the potential for upside. But you’re paying the price for it. The question should always be, if I hold off for a major opportunity, how much am I giving up today? One such event happened recently, when stocks had a flash crash, causing some of them to drop dramatically. Ford (F) was -24.7% at one point during the day, and ended -4.8%.
If you had no powder then, you’d just have to ride out the bumps and hope. However, if you had access to funds that could purchase, there was a great sale going on. Something still feels a little wrong about keeping money outside of your core investments to try and take advantage of a flash crash though, especially in the days of high frequency trading.
I guess the question remains, are you a trader, or an investor? If you are an investor, should you be keeping money outside of your investments, earning little to no income in a ZIRP environment in the hope that you get to be a trader for the day?
It is recommended that investors keep their “age” in bonds. If I do that, over half of my portfolio will be in bonds. I just can’t make the jump into that, so I’ve decided to keep my powder dry by putting the “bond” portion into CD’s and high-yielding savings accounts.
When the S&P drops to a certain point, I will take a portion of this “dry powder” and buy stock funds.
Perhaps this is market timing. Call it what you will–it helps me sleep at night.
I’d argue that if your powder is not in a liquid account it’s not dry. You can’t buy a sharp dip with this due to the time to move it in.. It happened to me when I wanted to buy but had to wait 4 days for the ach.
That age in bonds feels a bit outdated now also.
I’m told that the 1% typically keeps 20% of their assets in cash. That’s a lot of dry powder.
Yep, but when you’re in asset retention phase that’s to be expected. The question is, what gets you past asset accumulation phase the safest and fastest?
It all depends on what your plan is for this money is. If its for retirement in say 20-30 years, I’d say just stay the course. Perhaps during drops you could increase your contributions. Investing should be boring. Create a plan & stick to it! We think we’re smarter than the market; however this usually isn’t the case and being average (index funds) is just fine. Ford down 24% could have also ended down 30%. What would you have done after using your dry powder and losing 6%? Ride it out?