Dry powder strategy?

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Robot Monster
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Re: Dry powder strategy?

Post by Robot Monster »

willthrill81 wrote: Sat May 01, 2021 3:33 pm So what is your plan going forward?
Thank you for asking. I have two buckets of investments. Bucket 1 is meant for use in the future, beginning 30 years from now when I turn 76. Bucket 2 is money meant for use till I turn 76.

Bucket 1 for use between age 76-?
(40x expenses)
27% equities
18% 30 years TIPS (bought recently)

Bucket 2 for use between age 46-76
(48x expenses)
27% Vanguard Inflation-Protected Securities
18% 5yr, 10yr TIPS (bought maybe a couple years ago)
9% intermediate treasury fund

There is the issue that if inflation heats up, those 30yr TIPS will have a lot of phantom taxes that need paying, which I have not really thought through. But basically, seems if I just sit on these investments, and do nothing, I should be able to meet my financial goals.

I don't really have a plan for the cash I have on top of this, which isn't insignificant.

Would welcome any thoughts you (or anyone else, of course) has.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
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Robot Monster
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Re: Dry powder strategy?

Post by Robot Monster »

007Investor wrote: Sat May 01, 2021 6:07 pm Can you update your thoughts based on what Buffett said today, anything noteworthy that either changes your opinion or reinforces your caution, thanks.

Update: I just realized your original post was from last year, nevertheless what are your thoughts based on what was said today, thanks.
I actually didn't know he said anything. So, seems like he said,

"Billionaire investor Warren Buffett said Saturday that near-zero interest rates have completely changed the financial landscape, warning that the consequences of easy money policies remain an unanswered question."

Is this what you mean? I see he also said something about Robinhood.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
007Investor
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Re: Dry powder strategy?

Post by 007Investor »

Robot Monster wrote: Sun May 02, 2021 10:48 am
007Investor wrote: Sat May 01, 2021 6:07 pm Can you update your thoughts based on what Buffett said today, anything noteworthy that either changes your opinion or reinforces your caution, thanks.

Update: I just realized your original post was from last year, nevertheless what are your thoughts based on what was said today, thanks.
I actually didn't know he said anything. So, seems like he said,

"Billionaire investor Warren Buffett said Saturday that near-zero interest rates have completely changed the financial landscape, warning that the consequences of easy money policies remain an unanswered question."

Is this what you mean? I see he also said something about Robinhood.
He said much more.
Caduceus
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Re: Dry powder strategy?

Post by Caduceus »

Many people when they speak about "dry powder" don't use valuation-based strategies. It's just some vague sense that maybe some downturn is around the corner or something along those lines.

I think about cash as an asset class that functions like a put option on all asset classes at current market prices. When you think about it that way, it's clear that holding cash would be quite expensive if there were assets you could buy at fair or undervalued prices, and conversely, that cash is quite valuable if those assets were quite expensive relative to their intrinsic value.

I think people try it because the reward for getting even a moderate amount of timing right is so large. I was completely in cash in January 2020 (if you look at my posts, you'll see that prior to the market crash I was asking for advice about where to park almost all of my portfolio which was in cash temporarily for a few months while I figured out what to do with it, after having exited an investment at what I considered its fair valuation), but then bought slightly too early (started buying February - March 2020), with a big bunch of call options in mid-March 2020 (quite lucky), and even then, my entire portfolio is only up 77% YTD. I then sold off most (90%) of those call options way too early several weeks ago and of course the stock market has gone on a tear since then.

So you could say it's a lot (I've never had a 77% portfolio return so far) or you could say for someone who was lucky enough to get the timing moderately right, it doesn't seem like a lot at all. But I can totally understand why people try it because even small timing accuracies can produce quite outsized gains.

I like cash now. I am 27.7% in cash currently. If I can find something reasonable to buy, I will buy it even if the total stock market seems very expensive. But I'm unable to find other things I want to buy right now with that cash.
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Robot Monster
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Re: Dry powder strategy?

Post by Robot Monster »

007Investor wrote: Sun May 02, 2021 11:01 am [Buffett] said much more.
Well, I'll respond to this:
“Interest rates basically are to the value of assets what gravity is to matter” — and the rate on short-term Treasuries is really nothing today, the Berkshire Hathaway chairman said.

If Treasury rates are really supposed to be this low, those high-flying tech shares are a bargain, Buffett said (and that is one big “if”). That view contrasts with the prevailing wisdom in the market, which is that tech-stock valuations are extreme.
link

My response is, sadly, I don't know what to do with this information. One thing I have learned from being on the forum for a year is that stuff like this has an awful habit of not being very much actionable, and, probably best to ignore.

I suppose I am inclined to think that someone with stocks and cash might be well positioned. If the Fed unexpectedly hikes, cash will do nicely. If not, stocks will. But, I'm not really advocating anyone else do anything based on this little scrap of off-the-cuff analysis.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
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willthrill81
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Re: Dry powder strategy?

Post by willthrill81 »

Robot Monster wrote: Sun May 02, 2021 10:44 am
willthrill81 wrote: Sat May 01, 2021 3:33 pm So what is your plan going forward?
Thank you for asking. I have two buckets of investments. Bucket 1 is meant for use in the future, beginning 30 years from now when I turn 76. Bucket 2 is money meant for use till I turn 76.

Bucket 1 for use between age 76-?
(40x expenses)
27% equities
18% 30 years TIPS (bought recently)

Bucket 2 for use between age 46-76
(48x expenses)
27% Vanguard Inflation-Protected Securities
18% 5yr, 10yr TIPS (bought maybe a couple years ago)
9% intermediate treasury fund

There is the issue that if inflation heats up, those 30yr TIPS will have a lot of phantom taxes that need paying, which I have not really thought through. But basically, seems if I just sit on these investments, and do nothing, I should be able to meet my financial goals.

I don't really have a plan for the cash I have on top of this, which isn't insignificant.

Would welcome any thoughts you (or anyone else, of course) has.
Your second bucket makes a lot of sense for someone who is very risk averse. But your first bucket (i.e., for after age 76) doesn't make as much sense to me. Funds that aren't needed at all for 30+ years should be heavily, if not wholly, invested in equities. But I'm more aggressive than many, so perhaps your 60/40 AA for your 30+ year bucket isn't too bad for you.

Tax rates (aside from those impacting the taxation of SS benefits) are adjusted for inflation, so I don't see what 'phantom tax' you're referring to. If we get 10% inflation, the brackets will be moved upward 10% to compensate, for instance. And beyond that, any instrument that at least keeps pace with inflation will suffer from the same 'problem'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Robot Monster
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Re: Dry powder strategy?

Post by Robot Monster »

willthrill81 wrote: Sun May 02, 2021 2:36 pm
Robot Monster wrote: Sun May 02, 2021 10:44 am
willthrill81 wrote: Sat May 01, 2021 3:33 pm So what is your plan going forward?
Thank you for asking. I have two buckets of investments. Bucket 1 is meant for use in the future, beginning 30 years from now when I turn 76. Bucket 2 is money meant for use till I turn 76.

Bucket 1 for use between age 76-?
(40x expenses)
27% equities
18% 30 years TIPS (bought recently)

Bucket 2 for use between age 46-76
(48x expenses)
27% Vanguard Inflation-Protected Securities
18% 5yr, 10yr TIPS (bought maybe a couple years ago)
9% intermediate treasury fund

There is the issue that if inflation heats up, those 30yr TIPS will have a lot of phantom taxes that need paying, which I have not really thought through. But basically, seems if I just sit on these investments, and do nothing, I should be able to meet my financial goals.

I don't really have a plan for the cash I have on top of this, which isn't insignificant.

Would welcome any thoughts you (or anyone else, of course) has.
Your second bucket makes a lot of sense for someone who is very risk averse. But your first bucket (i.e., for after age 76) doesn't make as much sense to me. Funds that aren't needed at all for 30+ years should be heavily, if not wholly, invested in equities. But I'm more aggressive than many, so perhaps your 60/40 AA for your 30+ year bucket isn't too bad for you.

Tax rates (aside from those impacting the taxation of SS benefits) are adjusted for inflation, so I don't see what 'phantom tax' you're referring to. If we get 10% inflation, the brackets will be moved upward 10% to compensate, for instance. And beyond that, any instrument that at least keeps pace with inflation will suffer from the same 'problem'.
I appreciate the feedback. Oh, looks like they refer to what TIPS have as 'phantom income'. Every year you get taxed on the adjustment to the principle with TIPS. When normal dividends pay out, you can just toss part of that dividend cash to the government for taxes. But with a TIPS adjustment there's no cash being paid out, so, if you don't want to sell the TIPS themselves, you need something else to draw upon. A TIPS fund does not have this issue, just individual TIPS.

Yeah, I can see your point on the second bucket. I'm probably being overly cautious.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
Freefun
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Re: Dry powder strategy?

Post by Freefun »

I think what others call dry powder, I call rebalancing.
Remember when you wanted what you currently have?
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willthrill81
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Re: Dry powder strategy?

Post by willthrill81 »

Robot Monster wrote: Sun May 02, 2021 5:49 pm
willthrill81 wrote: Sun May 02, 2021 2:36 pm
Robot Monster wrote: Sun May 02, 2021 10:44 am
willthrill81 wrote: Sat May 01, 2021 3:33 pm So what is your plan going forward?
Thank you for asking. I have two buckets of investments. Bucket 1 is meant for use in the future, beginning 30 years from now when I turn 76. Bucket 2 is money meant for use till I turn 76.

Bucket 1 for use between age 76-?
(40x expenses)
27% equities
18% 30 years TIPS (bought recently)

Bucket 2 for use between age 46-76
(48x expenses)
27% Vanguard Inflation-Protected Securities
18% 5yr, 10yr TIPS (bought maybe a couple years ago)
9% intermediate treasury fund

There is the issue that if inflation heats up, those 30yr TIPS will have a lot of phantom taxes that need paying, which I have not really thought through. But basically, seems if I just sit on these investments, and do nothing, I should be able to meet my financial goals.

I don't really have a plan for the cash I have on top of this, which isn't insignificant.

Would welcome any thoughts you (or anyone else, of course) has.
Your second bucket makes a lot of sense for someone who is very risk averse. But your first bucket (i.e., for after age 76) doesn't make as much sense to me. Funds that aren't needed at all for 30+ years should be heavily, if not wholly, invested in equities. But I'm more aggressive than many, so perhaps your 60/40 AA for your 30+ year bucket isn't too bad for you.

Tax rates (aside from those impacting the taxation of SS benefits) are adjusted for inflation, so I don't see what 'phantom tax' you're referring to. If we get 10% inflation, the brackets will be moved upward 10% to compensate, for instance. And beyond that, any instrument that at least keeps pace with inflation will suffer from the same 'problem'.
I appreciate the feedback. Oh, looks like they refer to what TIPS have as 'phantom income'. Every year you get taxed on the adjustment to the principle with TIPS. When normal dividends pay out, you can just toss part of that dividend cash to the government for taxes. But with a TIPS adjustment there's no cash being paid out, so, if you don't want to sell the TIPS themselves, you need something else to draw upon. A TIPS fund does not have this issue, just individual TIPS.

Yeah, I can see your point on the second bucket. I'm probably being overly cautious.
That makes sense. Individual TIPS should likely be held in tax-advantaged when possible.
Last edited by willthrill81 on Mon May 03, 2021 9:45 am, edited 1 time in total.
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Freetime76
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Re: Dry powder strategy?

Post by Freetime76 »

Re: OP’s original post

Yes, we have a growing amount of dry powder. Sometimes we call it that ...
Last year, we had a bit of extra cash set aside, leftover from a home downsize. Then our taxable account went up with the market, and we opened the tap, so to speak, and drained off some of the gain. (Account is not earmarked for retirement.)

The purpose of this money is:
1. It keeps us from even being tempted to liquidate anything else.
2. A safety net for the property improvement projects going on right now.
3. A latent amount available for an opportunity that comes our way - may be a market drop, may be a piece of real estate here (our local area is rural and having auctions...but not in a good way - the kind sold cheaply), or tbd. We probably won’t spend it on anything, but it is there. If the market tanks, I probably won’t be able to resist buying while the index is “on sale”. I fantasize about this. It hasn’t happened thus far.
4. Give if we feel called to do so.

It’s funny. Having that amount there, totally available to spend, somehow keeps us from wanting to spend extra on anything.
Actin
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Re: Dry powder strategy?

Post by Actin »

Buffett could lose half his net worth twenty times and still not ever worry about money. What he's doing is irrelevant to everyone on this forum.
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Robot Monster
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Re: Dry powder strategy?

Post by Robot Monster »

Actin wrote: Mon May 03, 2021 8:42 am Buffett could lose half his net worth twenty times and still not ever worry about money. What he's doing is irrelevant to everyone on this forum.
But its Berkshire that's sitting on the money. Common everyday folk own Berkshire. Buffett is essentially keeping these people in dry powder via their Berkshire investment.
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willthrill81
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Re: Dry powder strategy?

Post by willthrill81 »

Actin wrote: Mon May 03, 2021 8:42 am Buffett could lose half his net worth twenty times and still not ever worry about money. What he's doing is irrelevant to everyone on this forum.
I largely agree. But retirees with a portfolio around 40 times greater than their annual expenses or more, and there are a number of such folks on this forum, certainly could be wholly invested in equities, assuming their risk tolerance permitted it. And they could do so with a smaller portfolio, but the risk of a very poor sequence of returns would be significantly higher.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Scott S
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Re: Dry powder strategy?

Post by Scott S »

Robot Monster wrote: Mon May 03, 2021 9:32 amBut its Berkshire that's sitting on the money. Common everyday folk own Berkshire. Buffett is essentially keeping these people in dry powder via their Berkshire investment.
In past decades, keeping all that cash on the side was a shrewd move for Berkshire. Anymore, it just seems like they're stuck and don't know what to do with it. I don't regret selling my couple thousand in BRK-B shares a few years ago.
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secondopinion
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Re: Dry powder strategy?

Post by secondopinion »

Robot Monster wrote: Thu May 28, 2020 2:13 pm I personally set aside some dry powder, have been watching in dismay the seemingly unstoppable stock market rally, and have been asking myself whatever shall I do with all this cash I so brilliantly set aside. If you're also in the "dry powder club" I thought it would be nice if we could all get together and commiserate a bit.

So, what is your dry powder strategy? What's stopping you from deploying, taking that brave dive back in (or at least tiptoeing slowly back in, dollar cost averaging style)?

***

Here's what's stopping me: Warren Buffett. Yes, Warren Buffett, and the mountain of cash he has Berkshire sitting on. “The cash position isn’t that huge when I look at the worst-case possibilities,” he said during Berkshire’s virtual shareholder meeting earlier this month. I ask myself, why shouldn't I keep my powder dry if he's basically doing the same.

And yet...

I also ask myself if I'm just grasping for reasons to double down on my own stupidity.

*Sigh*
I would over rebalance my portfolio and do aggressively. This is something like this:

If there was a drop like 20% on a $100,000 portfolio of 60/40, the $60,000/$40,000 becomes $48,000/$40,000; in order to rebalance, I would have to divert $4800 to stocks. However, divert triple this (in theory, you could do any multiple greater to 1); so it becomes $62400/$25600, now a 70.9%/29.1% split. Set caps for a maximum/minimum (say 80/20 maximum and 40/60 minimum). New cash is invested at 60/40 to help neutralize it over time.

The more aggressive the over rebalance, the wider the bounds needed. It will guarantee that you actually deploy dry powder systematically, as well as build it back up. For riskier portfolios, you could set say 60/40 as the minimum; you can also set the neutralizing portfolio to be also the minimum as well. It all depends on minimum and maximum risk desired. It avoids market timing, as well as satisfy the "value" desire to use "dry powder".

As far as where to hold "dry powder", just hold it in shorter term bonds but not too short (duration of 3-5 years). No sense being too conservative. Those bonds not subject to this should be longer duration to add duration risk back into the portfolio; you could also do the same with over rebalancing into long-term bonds, but that is a non-trivial exercise.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
Reamus294
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Re: Dry powder strategy?

Post by Reamus294 »

Not really a strategy, but I’d revaluate my liquidity needs if there was a down-turn. We have savings for emergency funds, newer car, mortgage payoff. I’d consider investing a portion of these depending on the circumstances. I have been considering reducing our emergency funds and newer car funds and investing the reduction anyways. Just waiting for something to push me in one direction or another.

Dry powder is inefficient compared to dollar-cost averaging, but as liquidity needs change over time, I may try to take advantage of some of those changes.
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