Dry Powder…Am I thinking of this correctly?

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BV3273
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Dry Powder…Am I thinking of this correctly?

Post by BV3273 »

Hello All,

I’ve been working on building up my EF/Cash position/Cash-equivalent position. I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month - my sales commissions are the main reason for this. My question is if there is a market correction type event would it be wise to deploy some of this cash into the market to average down? Say 3-6 months of my emergency fund. I saw a lot of talk about this topic back in March 2020 when the market took a dive. I just want to make sure I am perceiving this properly and my thought process makes sense.

Thanks in advance!
-BV
dcabler
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Re: Dry Powder…Am I thinking of this correctly?

Post by dcabler »

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Noobvestor
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Re: Dry Powder…Am I thinking of this correctly?

Post by Noobvestor »

Your emergency fund is your emergency fund - it's there for emergencies. Those can coincide with stock downturns (e.g. lost job, etc).

Separately, having fixed income (cash and/or bonds) in your portfolio can help soften downturns and give you something to rebalance with.

But what you're suggesting is just market timing from what I can tell - how will you know what to buy and what if an emergency comes up?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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JoeRetire
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Re: Dry Powder…Am I thinking of this correctly?

Post by JoeRetire »

BV3273 wrote: Tue Jul 20, 2021 6:41 am Hello All,

I’ve been working on building up my EF/Cash position/Cash-equivalent position. I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month - my sales commissions are the main reason for this. My question is if there is a market correction type event would it be wise to deploy some of this cash into the market to average down? Say 3-6 months of my emergency fund.
That would bring you below your "12 months of expenses" goal. Why would you sacrifice that?
Just remember: it's not a lie if you believe it.
Da5id
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Re: Dry Powder…Am I thinking of this correctly?

Post by Da5id »

BV3273 wrote: Tue Jul 20, 2021 6:41 am Hello All,

I’ve been working on building up my EF/Cash position/Cash-equivalent position. I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month - my sales commissions are the main reason for this. My question is if there is a market correction type event would it be wise to deploy some of this cash into the market to average down? Say 3-6 months of my emergency fund. I saw a lot of talk about this topic back in March 2020 when the market took a dive. I just want to make sure I am perceiving this properly and my thought process makes sense.

Thanks in advance!
-BV
Most here would probably say bad idea. Your emergency fund is for emergencies. Job loss, car dies, big hospital bills, etc. The stock market falling isn't an emergency.

Beyond that, you should invest to your target allocation, say 60% stocks or whatever suits you. Trying to market time leaving cash on the sidelines waiting to "buy on the dips" is not historically a winning strategy.
retiredjg
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Re: Dry Powder…Am I thinking of this correctly?

Post by retiredjg »

I would not use my emergency fund for "dry powder" at the time my income is most likely to dry up or go away completely.

You are wise to realize your commission based income is variable enough to need a larger emergency fund. Stick with that.

Having a bond allocation in your portfolio can serve the same purpose as having cash sitting on the side as dry powder. As the market goes down, your stock allocation drops with it. Sell some bonds and buy stocks to try to maintain the stock to bond ratio you had before the crash. When the market does turn around, you will have a decent allocation to stocks to give you a faster recovery.
UpperNwGuy
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Re: Dry Powder…Am I thinking of this correctly?

Post by UpperNwGuy »

Emergency funds are not dry powder.
dbr
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Re: Dry Powder…Am I thinking of this correctly?

Post by dbr »

Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
Destiple
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Re: Dry Powder…Am I thinking of this correctly?

Post by Destiple »

retiredjg wrote: Tue Jul 20, 2021 6:53 am I would not use my emergency fund for "dry powder" at the time my income is most likely to dry up or go away completely.

You are wise to realize your commission based income is variable enough to need a larger emergency fund. Stick with that.

Having a bond allocation in your portfolio can serve the same purpose as having cash sitting on the side as dry powder. As the market goes down, your stock allocation drops with it. Sell some bonds and buy stocks to try to maintain the stock to bond ratio you had before the crash. When the market does turn around, you will have a decent allocation to stocks to give you a faster recovery.
If market goes down doesn’t the bonds go down as well ?
So both stocks and bonds are lower in value than before
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Re: Dry Powder…Am I thinking of this correctly?

Post by Zeppcoustic »

dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
LOL :sharebeer
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JoMoney
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Re: Dry Powder…Am I thinking of this correctly?

Post by JoMoney »

UpperNwGuy wrote: Tue Jul 20, 2021 6:59 am Emergency funds are not dry powder.
This... I encourage the idea of having some amount of cash for a personal emergency, or even what Dave Ramsey calls a "Hill and Valley Fund" to smooth out irregular income. That's not money looking to be invested in risky assets like stocks, that can fall substantially even after a steep fall.
Emergency fund money is to pay the rent and keep the lights on, for perhaps a few months or more, so you can "survive" long enough to strategize and adapt to your now lower income, or perhaps to pay for an unexpected one time emergency event without a major disruption to your regular finances.
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TimeTheMarket
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Re: Dry Powder…Am I thinking of this correctly?

Post by TimeTheMarket »

dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
Not sure if you're getting at the same view of it I have but I've always hated the concept. If you have "dry powder" it means you were not invested while the market was going up. And, if your belief is that the market is generally going to increase you should be fully invested.

In other words a guy who has 100% in stocks vs one who has 90% in stocks and 10% out to "buy the dips"... the first guy will win. It's just a variant on market timing.
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dormid
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Re: Dry Powder…Am I thinking of this correctly?

Post by dormid »

It sounds like you don't actually think you need a 12-month emergency fund, or you probably wouldn't be talking about spending it during a recession.

If that money can be invested, it should be invested now! No one knows how much more growth there will be before the next correction, and it's best to be in the market to capture it.
retiredjg
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Re: Dry Powder…Am I thinking of this correctly?

Post by retiredjg »

duplicate
Last edited by retiredjg on Tue Jul 20, 2021 9:01 am, edited 1 time in total.
retiredjg
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Re: Dry Powder…Am I thinking of this correctly?

Post by retiredjg »

Destiple wrote: Tue Jul 20, 2021 8:16 am If market goes down doesn’t the bonds go down as well ?
So both stocks and bonds are lower in value than before
It is not impossible for stocks and bonds to go down at the same time. But stocks and bonds tend to operate independently from each other. Frequently one will zig while the other one zags and vice versa. Or one zigs and the other one zigs later on. That is why adding bonds (or other fixed income assets) is the best possible diversifier for a portfolio.

Even if bonds do go down in value at the same time as stocks, it is likely to be less of a drop than stocks during a stock market downturn.
nigel_ht
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

BV3273 wrote: Tue Jul 20, 2021 6:41 am Hello All,

I’ve been working on building up my EF/Cash position/Cash-equivalent position. I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month - my sales commissions are the main reason for this. My question is if there is a market correction type event would it be wise to deploy some of this cash into the market to average down? Say 3-6 months of my emergency fund. I saw a lot of talk about this topic back in March 2020 when the market took a dive. I just want to make sure I am perceiving this properly and my thought process makes sense.

Thanks in advance!
-BV
It depends on whether 12 months is really the amount of liquidity (cash and short term marketable securities) you want to maintain to guard against "Really Bad Things May Happen" or if 6-9 months is really the amount of liquidity you want to maintain.

If money is really earmarked for an EF then it's not liquid anymore even if it is sitting as cash. If you wouldn't blow part of your EF on a new car then spending it on "buying the dip" isn't much wiser.

For most folks, with a regular income, 6 months of liquid reserves makes sense. This can be part of their normal AA or as a separate EF. For someone commission based with wide swings in income 12 months might be wiser.

On the other hand, if you have a 6 month EF + 6 months of expenses saved toward a new car you DO have 6 months worth of discretionary liquid assets you can dump into the market (aka Dry Powder). You can decide to forgo your discretionary purchase to "buy the dip" instead if you want...assuming your current car isn't on its deathbed. A house downpayment is another example...if you lose it you will set back your goal of owning a home but it won't actually make you homeless.

That's generally the form of "dry powder" that are financial assets you can use for either offense or defense (or just a party). Reserves are just that...reserves, assets not actually committed to doing something. If you have assets guarding the flank from an actual threat those aren't reserves. They are doing something even if they are just sitting there. If you use those up to go on the offense, nobody is guarding your flank and "Really Bad Things May Happen".

That's perfectly fine if that's what you need to do...sometimes you can't win without risking defeat but you will deliberately increase risk of disaster to achieve a victory.
RubyTuesday
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Re: Dry Powder…Am I thinking of this correctly?

Post by RubyTuesday »

dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.
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MarkRoulo
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Re: Dry Powder…Am I thinking of this correctly?

Post by MarkRoulo »

BV3273 wrote: Tue Jul 20, 2021 6:41 am Hello All,

I’ve been working on building up my EF/Cash position/Cash-equivalent position. I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month - my sales commissions are the main reason for this. My question is if there is a market correction type event would it be wise to deploy some of this cash into the market to average down? Say 3-6 months of my emergency fund. I saw a lot of talk about this topic back in March 2020 when the market took a dive. I just want to make sure I am perceiving this properly and my thought process makes sense.

Thanks in advance!
-BV
Stocks often go down because of some uncertainty in the economy that is then reflected in the stock market.

Two recent examples would be the stock drop around the dot-com crash and the stock drop around the real estate collapse in 2008.

You are proposing to REDUCE your emergency fund at exactly the time that you become more likely to need it, correct?

This might make sense if your sales commissions became more predictable (and not because they were very predictably LOW) as the stock market dropped, but my guess is that this isn't how sales commissions work...
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

RubyTuesday wrote: Tue Jul 20, 2021 9:06 am
dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.
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Re: Dry Powder…Am I thinking of this correctly?

Post by Wiggums »

dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1
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Re: Dry Powder…Am I thinking of this correctly?

Post by dormid »

nigel_ht wrote: Tue Jul 20, 2021 9:35 am
RubyTuesday wrote: Tue Jul 20, 2021 9:06 am
dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.

They know what it means, dbr was making a joke. They think the metaphor doesn't apply because keeping some of your investment money in cash until there's a downturn is a bad idea. It's just another form of market timing.
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Re: Dry Powder…Am I thinking of this correctly?

Post by terran »

Dry powder is just another way of saying market timing. You'll find many threads on why that's not a recommended strategy. If you feel you need a 12 month emergency fund then you shouldn't invest any of it during a market downturn. If you feel you need a 3 or 6 month emergency fund then you should invest anything in excess of that right now.
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Re: Dry Powder…Am I thinking of this correctly?

Post by retired@50 »

BV3273 wrote: Tue Jul 20, 2021 6:41 am I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month
If I held a job like yours, I'd be pretty cautious. Keep the 12 months expenses in the emergency fund and spend it during an emergency, like unemployment, medical needs, etc.

Buying more stock at low prices doesn't fit the definition of an emergency.

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Re: Dry Powder…Am I thinking of this correctly?

Post by eye.surgeon »

Also keep in mind that after you have a certain amount in a taxable account, an emergency fund becomes redundant in my opinion.
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

dormid wrote: Tue Jul 20, 2021 9:46 am
nigel_ht wrote: Tue Jul 20, 2021 9:35 am
RubyTuesday wrote: Tue Jul 20, 2021 9:06 am
dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.

They know what it means, dbr was making a joke. They think the metaphor doesn't apply because keeping some of your investment money in cash until there's a downturn is a bad idea. It's just another form of market timing.
Buffett disagrees...it may or may not be bad for the average retail investor but for some folks it works.

And I provided a scenario where you can have dry powder even as a retail investor...you have cash savings for a large discretionary purchase.
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Re: Dry Powder…Am I thinking of this correctly?

Post by esqu1re »

eye.surgeon wrote: Tue Jul 20, 2021 9:58 am Also keep in mind that after you have a certain amount in a taxable account, an emergency fund becomes redundant in my opinion.
I think I agree. For people who have many years of living expenses invested in non tax advantaged accounts, whats the purpose of keeping a 6-12 month liquid EF (or cash in a safe) instead of 6-12 month of funds invested in an index fund? Is it just a couple of days lag time and the emotional aspect of possibly selling funds at a loss due to an emergency?
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Re: Dry Powder…Am I thinking of this correctly?

Post by Outer Marker »

I don't believe in emergency funds. Once you have a sufficient level of assets, having set-aside of low yielding cash reserves is unnecessary and depresses your returns. I keep enough cash on hand to cover major unexpected repairs, etc., but in the event of a true emergency, would borrow from the sizable fixed income portion of my portfolio. I have several years in very stable fixed income assets -- but they are counted as part of my 70/30 portfolio. In the event of a major downturn, I rebalance aggressively into equities.
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Re: Dry Powder…Am I thinking of this correctly?

Post by bertilak »

JoMoney wrote: Tue Jul 20, 2021 8:30 am ... a "Hill and Valley Fund" to smooth out irregular income
... or irregular (not necessarily emergency) expenses. I don't look at it as a special fund, I just like to keep my checking account balance comfortably above water. If there is an unusually high expense (or set thereof) my overdraft protection can hold me over. "Comfortably above water" means this hardly ever happens.

In an emergency, I can sell off some of my investments. An emergency can justify that -- or it's not an emergency!
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Bernmaster
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Re: Dry Powder…Am I thinking of this correctly?

Post by Bernmaster »

As an European, concept of a large emergency fund appears unnecessary to me. In case of most emergencies (health issues, unemployment) there is basically no immediate financial downside because we’re fully covered by the public welfare system. We keep some money on hand if maybe the car breaks down. However, we also pay a very high price in the form of taxes for this safety net
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Re: Dry Powder…Am I thinking of this correctly?

Post by milktoast »

Ok, I'll go against the crowd.

My income is also very lumpy. Only get takehome pay twice a year by selling RSU. And if I'm holding insider information, I may not be able to sell on time. So I hold significant cash; roughly ~16 months after tax expenses which gets spent down then filled up again. But if my income comes in as expected, I have to pay estimated tax, which takes it down to covering roughly 10 months of total expenditure. Note that this isn't an emergency fund really, it's my spending fund.

In March-April 2020, I deployed all the cash that wasn't absolutely needed before July into the market. Knowing that I was unlikely to be locked up in June when my next RSU vest occured. If a true emergency occured, I could use credit line, margin, or sell in taxable.

So yeah, market timing. But not really dry powder and not really an emergency fund.

I think similar may apply to the OP. Because their comp is not steady, they need a cash holding. But they may be able to predict whether comp is going to happen a few months out. And if a big market drop occurs a few months before getting money that would have been invested anyway, I think it makes sense to shift that timing of some of that investment by using your cash on hand.
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Re: Dry Powder…Am I thinking of this correctly?

Post by etfan »

I thought someone did the math on the "dry powder" concept and it turned out it wasn't a good idea. I don't remember the details, but it's something like you waste too much time waiting for the right time and miss too much potential earnings. And, on average, the growth you get won't make up for that loss or won't exceed it by too much to justify the effort. Is this not correct?
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Re: Dry Powder…Am I thinking of this correctly?

Post by retired@50 »

etfan wrote: Tue Jul 20, 2021 1:37 pm I thought someone did the math on the "dry powder" concept and it turned out it wasn't a good idea. I don't remember the details, but it's something like you waste too much time waiting for the right time and miss too much potential earnings. And, on average, the growth you get won't make up for that loss or won't exceed it by too much to justify the effort. Is this not correct?
Benjamin Felix did a podcast (The Rational Reminder) on "Buying the Dip" and concluded that it doesn't usually help.

See link: viewtopic.php?p=6086445#p6086445

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Re: Dry Powder…Am I thinking of this correctly?

Post by PVW »

dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
Goldbrick Fund is a more accurate name.
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Re: Dry Powder…Am I thinking of this correctly?

Post by RubyTuesday »

nigel_ht wrote: Tue Jul 20, 2021 9:35 am
RubyTuesday wrote: Tue Jul 20, 2021 9:06 am
dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.
Completely disagree, and that’s ok by me. Dry powder is NEEDED to fire your musket… dry powder (cash) is not needed to conduct financial transactions and keeping dry powder creates a cash drag. I have seldom had significant cash holdings beyond what I need to spend or emergency funds.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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Re: Dry Powder…Am I thinking of this correctly?

Post by Trader Joe »

BV3273 wrote: Tue Jul 20, 2021 6:41 am Hello All,

I’ve been working on building up my EF/Cash position/Cash-equivalent position. I am aiming for 12 months of expenses as my compensation can vary pretty significantly from month to month - my sales commissions are the main reason for this. My question is if there is a market correction type event would it be wise to deploy some of this cash into the market to average down? Say 3-6 months of my emergency fund. I saw a lot of talk about this topic back in March 2020 when the market took a dive. I just want to make sure I am perceiving this properly and my thought process makes sense.

Thanks in advance!
-BV
No, you are not thinking correctly.
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

RubyTuesday wrote: Tue Jul 20, 2021 9:07 pm
nigel_ht wrote: Tue Jul 20, 2021 9:35 am
RubyTuesday wrote: Tue Jul 20, 2021 9:06 am
dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.
Completely disagree, and that’s ok by me. Dry powder is NEEDED to fire your musket… dry powder (cash) is not needed to conduct financial transactions and keeping dry powder creates a cash drag. I have seldom had significant cash holdings beyond what I need to spend or emergency funds.
What do you buy stocks with? My broker wants cash. I could use credit but at some point they want me to settle in US dollars.

The point is when you “need to spend” then you want to have cash. You can’t “buy the dip” unless you have liquidity.
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Re: Dry Powder…Am I thinking of this correctly?

Post by Doom&Gloom »

Dry powder is necessary if you want to time the market. (That is probably why it is heard so often on financial porn shows.)

Otherwise, no powder at all is necessary. Set an AA, stick to it by rebalancing as necessary, and live your life.
RubyTuesday
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Re: Dry Powder…Am I thinking of this correctly?

Post by RubyTuesday »

nigel_ht wrote: Tue Jul 20, 2021 9:17 pm
RubyTuesday wrote: Tue Jul 20, 2021 9:07 pm
nigel_ht wrote: Tue Jul 20, 2021 9:35 am
RubyTuesday wrote: Tue Jul 20, 2021 9:06 am
dbr wrote: Tue Jul 20, 2021 7:44 am Dry powder is a metaphor that does not apply to investing. If you are planning to cross the Delaware to attack the British and want to be sure your muskets still fire, then keep your powder dry.
+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.
Completely disagree, and that’s ok by me. Dry powder is NEEDED to fire your musket… dry powder (cash) is not needed to conduct financial transactions and keeping dry powder creates a cash drag. I have seldom had significant cash holdings beyond what I need to spend or emergency funds.
What do you buy stocks with? My broker wants cash. I could use credit but at some point they want me to settle in US dollars.

The point is when you “need to spend” then you want to have cash. You can’t “buy the dip” unless you have liquidity.
When I was earning and saving, I bought stocks from paychecks.

Now that I’m retired, I buy stocks by selling bonds or other stocks.

My broker has a T+ something settlement timeframe that has never presented me with a liquidity issue. I’m not selling my house or an exotic car or physical commodities to buy stocks (not that I invest in those).

Have you ever experienced a liquidity issue that presented you from buying stocks? Tell us about it.

Keeping extra cash for “opportunities” is market timing and I just don’t believe I’m good enough (or that others are reliably good enough) at market timing to overcome the opportunity cost created by the cash drag.
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Re: Dry Powder…Am I thinking of this correctly?

Post by achillesheel »

eye.surgeon wrote: Tue Jul 20, 2021 9:58 am Also keep in mind that after you have a certain amount in a taxable account, an emergency fund becomes redundant in my opinion.
Eye Surgeon, how do you think about this threshold? What might the "certain amount" be? 1x, 5x, 10x your yearly expenses in taxable?
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Re: Dry Powder…Am I thinking of this correctly?

Post by bertilak »

achillesheel wrote: Wed Jul 21, 2021 8:57 am
eye.surgeon wrote: Tue Jul 20, 2021 9:58 am Also keep in mind that after you have a certain amount in a taxable account, an emergency fund becomes redundant in my opinion.
Eye Surgeon, how do you think about this threshold? What might the "certain amount" be? 1x, 5x, 10x your yearly expenses in taxable?
I'm not eye.surgeon but in my case I do the following, as stated in my earlier post:
I keep my checking account balance comfortably above water. If there is an unusually high expense (or set thereof) my overdraft protection can hold me over. "Comfortably above water" means this hardly ever happens.

In an emergency, I can sell off some of my investments. An emergency can justify that -- or it's not an emergency!
"hardly ever happens is my threshold.
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Re: Dry Powder…Am I thinking of this correctly?

Post by achillesheel »

bertilak wrote: Wed Jul 21, 2021 9:06 am
achillesheel wrote: Wed Jul 21, 2021 8:57 am
eye.surgeon wrote: Tue Jul 20, 2021 9:58 am Also keep in mind that after you have a certain amount in a taxable account, an emergency fund becomes redundant in my opinion.
Eye Surgeon, how do you think about this threshold? What might the "certain amount" be? 1x, 5x, 10x your yearly expenses in taxable?
I'm not eye.surgeon but in my case I do the following, as stated in my earlier post:
I keep my checking account balance comfortably above water. If there is an unusually high expense (or set thereof) my overdraft protection can hold me over. "Comfortably above water" means this hardly ever happens.

In an emergency, I can sell off some of my investments. An emergency can justify that -- or it's not an emergency!
That's my threshold.
Hi Bertilak, thanks for responding and sharing. But, how big would your taxable account be for you to feel comfortable with using it to backstop in case of emergency? Or does the size of the taxable not matter for you? I ask because eye.surgeon indicated that he would abandon a cash-only emergency fund once his taxable got big enough.
The unexamined life is not worth living.
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

RubyTuesday wrote: Wed Jul 21, 2021 7:21 am
nigel_ht wrote: Tue Jul 20, 2021 9:17 pm
RubyTuesday wrote: Tue Jul 20, 2021 9:07 pm
nigel_ht wrote: Tue Jul 20, 2021 9:35 am
RubyTuesday wrote: Tue Jul 20, 2021 9:06 am

+1.

Metaphors may have explanatory power, but are still phrases applied to situations where they are (literally) not applicable.

Keeping your powder dry in the context of war is having the necessary assets to be able to fight Right Now and not wait for assets to be ready. Wet powder doesn't ignite so you aren't ready for battle.

Keeping your powder dry in the context of finances is having the necessary assets to be able to invest Right Now and not wait for assets to be ready. Illiquid assets are hard to sell so you aren't ready to invest.

The phrase was adapted to investing because it applies very well.
Completely disagree, and that’s ok by me. Dry powder is NEEDED to fire your musket… dry powder (cash) is not needed to conduct financial transactions and keeping dry powder creates a cash drag. I have seldom had significant cash holdings beyond what I need to spend or emergency funds.
What do you buy stocks with? My broker wants cash. I could use credit but at some point they want me to settle in US dollars.

The point is when you “need to spend” then you want to have cash. You can’t “buy the dip” unless you have liquidity.
When I was earning and saving, I bought stocks from paychecks.
aka cash.
Now that I’m retired, I buy stocks by selling bonds or other stocks.
aka cash.
My broker has a T+ something settlement timeframe that has never presented me with a liquidity issue. I’m not selling my house or an exotic car or physical commodities to buy stocks (not that I invest in those).

Have you ever experienced a liquidity issue that presented you from buying stocks? Tell us about it.
Yeah, it's pretty simple. I wanted to buy something and e-trade said "you need more money...these transactions haven't settled yet so you can't use those funds yet". I moved in money from a banking account.
Keeping extra cash for “opportunities” is market timing and I just don’t believe I’m good enough (or that others are reliably good enough) at market timing to overcome the opportunity cost created by the cash drag.
That's fine for you. Others believe differently...so the TERM is valid. Just because you don't like market timing doesn't mean others don't do it successfully (example: Warren Buffett).
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

achillesheel wrote: Wed Jul 21, 2021 9:12 am
bertilak wrote: Wed Jul 21, 2021 9:06 am
achillesheel wrote: Wed Jul 21, 2021 8:57 am
eye.surgeon wrote: Tue Jul 20, 2021 9:58 am Also keep in mind that after you have a certain amount in a taxable account, an emergency fund becomes redundant in my opinion.
Eye Surgeon, how do you think about this threshold? What might the "certain amount" be? 1x, 5x, 10x your yearly expenses in taxable?
I'm not eye.surgeon but in my case I do the following, as stated in my earlier post:
I keep my checking account balance comfortably above water. If there is an unusually high expense (or set thereof) my overdraft protection can hold me over. "Comfortably above water" means this hardly ever happens.

In an emergency, I can sell off some of my investments. An emergency can justify that -- or it's not an emergency!
That's my threshold.
Hi Bertilak, thanks for responding and sharing. But, how big would your taxable account be for you to feel comfortable with using it to backstop in case of emergency? Or does the size of the taxable not matter for you? I ask because eye.surgeon indicated that he would abandon a cash-only emergency fund once his taxable got big enough.
Do I have enough cash/assets to get out of the country if I can't access my portfolio?
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Re: Dry Powder…Am I thinking of this correctly?

Post by bertilak »

achillesheel wrote: Wed Jul 21, 2021 9:12 am Hi Bertilak, thanks for responding and sharing. But, how big would your taxable account be for you to feel comfortable with using it to backstop in case of emergency? Or does the size of the taxable not matter for you? I ask because eye.surgeon indicated that he would abandon a cash-only emergency fund once his taxable got big enough.
I don't think that's the right question. Either you have a big enough nest egg or you don't. Allocating some as cash does not help with your ability to withstand adverse market conditions. Your stock/bond AA covers that base. It is best to keep your cash allocation to a minimum so you can put as much of your money to work (keep it invested) as possible, or as convenient.

The amount of cash you have is more a matter of convenience, smoothing the ride, the "hill and valley" concept mentioned above. You can set that amount (roughly) by monitoring your cash flow. There is no magic high-cash ratio that's going to take you from untenable to tenable. At least I don't think so.
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Re: Dry Powder…Am I thinking of this correctly?

Post by achillesheel »

bertilak wrote: Wed Jul 21, 2021 10:43 am
achillesheel wrote: Wed Jul 21, 2021 9:12 am Hi Bertilak, thanks for responding and sharing. But, how big would your taxable account be for you to feel comfortable with using it to backstop in case of emergency? Or does the size of the taxable not matter for you? I ask because eye.surgeon indicated that he would abandon a cash-only emergency fund once his taxable got big enough.
I don't think that's the right question. Either you have a big enough nest egg or you don't. Allocating some as cash does not help with your ability to withstand adverse market conditions. Your stock/bond AA covers that base. It is best to keep your cash allocation to a minimum so you can put as much of your money to work (keep it invested) as possible, or as convenient.
I'm referring to an emergency fund, a pot of cash one presumably keeps to pay the bills if an emergency hits. It has nothing to do whatsoever with managing adverse market conditions or as part of one's AA. Rather, it's about managing the financial impact of adverse personal circumstances.

I'm asking, what's a "big enough nest egg," the one that makes you comfortable with investing everything (other than your checking acct) at your preferred stock/bond AA? Or, in your opinion, does it not matter whether your nest egg is big enough? In that latter case, as you seem to suggest, just pile everything into the AA and dispense with the idea of an emergency fund - at any stage in the game. I ask as a young investor.
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Re: Dry Powder…Am I thinking of this correctly?

Post by Nowizard »

Depending on the size of your portfolio, and assuming that the cash used to purchase equities/bonds during a downturn would be purchases in taxable accounts, you have another alternative to the most conservative ones generally recommended here. If you had an emergency that exceeded your EF, you could sell some of your taxable investments, including tax loss harvesting. In other words, the assets diverted to equities would then be a portion of your EF even though you would possibly be selling assets with gains. Your decision whether that would be worth the risk.

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Re: Dry Powder…Am I thinking of this correctly?

Post by bertilak »

achillesheel wrote: Wed Jul 21, 2021 11:37 am
bertilak wrote: Wed Jul 21, 2021 10:43 am
achillesheel wrote: Wed Jul 21, 2021 9:12 am Hi Bertilak, thanks for responding and sharing. But, how big would your taxable account be for you to feel comfortable with using it to backstop in case of emergency? Or does the size of the taxable not matter for you? I ask because eye.surgeon indicated that he would abandon a cash-only emergency fund once his taxable got big enough.
I don't think that's the right question. Either you have a big enough nest egg or you don't. Allocating some as cash does not help with your ability to withstand adverse market conditions. Your stock/bond AA covers that base. It is best to keep your cash allocation to a minimum so you can put as much of your money to work (keep it invested) as possible, or as convenient.
I'm referring to an emergency fund, a pot of cash one presumably keeps to pay the bills if an emergency hits. It has nothing to do whatsoever with managing adverse market conditions or as part of one's AA. Rather, it's about managing the financial impact of adverse personal circumstances.

I'm asking, what's a "big enough nest egg," the one that makes you comfortable with investing everything (other than your checking acct) at your preferred stock/bond AA? Or, in your opinion, does it not matter whether your nest egg is big enough? In that latter case, as you seem to suggest, just pile everything into the AA and dispense with the idea of an emergency fund - at any stage in the game. I ask as a young investor.
I guess what I am saying is that the answer is ZERO. If it's an emergency that justifies selling off some of your assets. If you insist on having enough cash on hand to cover ANY emergency then there is no reasonable answer.

This does assume your assets are liquid.

SECOND THOUGHTS! if all your assets are in accounts where there is a penalty for taking out cash then you DO want something liquid outside of those accounts, but it should be in something fairly safe (Bonds?). How much? Pick the size of emergency you want to be prepared for and build up this emergency fund to that level. As time goes on you may feel you can afford a larger such fund.
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

bertilak wrote: Wed Jul 21, 2021 12:34 pm
I guess what I am saying is that the answer is ZERO. If it's an emergency that justifies selling off some of your assets. If you insist on having enough cash on hand to cover ANY emergency then there is no reasonable answer.
You want enough funds to cover ANY emergency long enough to access less liquid assets without catastrophic outcomes or just without significant penalties (as you point out with retirement funds).

Sometimes that's 0 or infinity but there are reasonable cases in between that you can do some analysis and come up with a some reasonable number for your own situation.
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Re: Dry Powder…Am I thinking of this correctly?

Post by bertilak »

nigel_ht wrote: Wed Jul 21, 2021 1:14 pm
bertilak wrote: Wed Jul 21, 2021 12:34 pm
I guess what I am saying is that the answer is ZERO. If it's an emergency that justifies selling off some of your assets. If you insist on having enough cash on hand to cover ANY emergency then there is no reasonable answer.
You want enough funds to cover ANY emergency long enough to access less liquid assets without catastrophic outcomes or just without significant penalties (as you point out with retirement funds).

Sometimes that's 0 or infinity but there are reasonable cases in between that you can do some analysis and come up with a some reasonable number for your own situation.
Two points:
  1. I assumed we were talking about stock and bond investments and how much cash should go along with that.
  2. "for your own situation" excludes a generic answer, making any answer here moot. I went with zero.
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Re: Dry Powder…Am I thinking of this correctly?

Post by nigel_ht »

bertilak wrote: Wed Jul 21, 2021 2:11 pm
nigel_ht wrote: Wed Jul 21, 2021 1:14 pm
bertilak wrote: Wed Jul 21, 2021 12:34 pm
I guess what I am saying is that the answer is ZERO. If it's an emergency that justifies selling off some of your assets. If you insist on having enough cash on hand to cover ANY emergency then there is no reasonable answer.
You want enough funds to cover ANY emergency long enough to access less liquid assets without catastrophic outcomes or just without significant penalties (as you point out with retirement funds).

Sometimes that's 0 or infinity but there are reasonable cases in between that you can do some analysis and come up with a some reasonable number for your own situation.
Two points:
  • I assumed we were talking about stock and bond investments and how much cash should go along with that.
  • "for your own situation" excludes a generic answer, making any answer here moot.
Well cash is part of your AA. Given we choose an AA based on our personal risk tolerance a lot of this is subjective.

If liquidity has little value then cash as part of your portfolio has little purpose except as the ultimate form of “ballast”.

I guess my point is that zero isn’t any less arbitrary than any other value.
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