Dry Powder…Am I thinking of this correctly?

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

Post by bertilak »

nigel_ht wrote: Wed Jul 21, 2021 2:15 pm
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.
You are right. Your answer above ("enough funds to cover ANY emergency long enough to access less liquid assets without catastrophic outcomes"), given a stock/bond assumption, comes down to zero as all assets are highly liquid and there are no "less liquid" assets to protect, other than the examples already cited. Your answer also is essentially the same as my comment about deciding on the size of the emergency to deal with and have that amount of money in safe, liquid, assets. That is not a function (e.g. percentage) of the size of one's nest egg, other than that being limiting factor.
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eye.surgeon
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Re: Dry Powder…Am I thinking of this correctly?

Post by eye.surgeon »

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 would say if you have a year+ of expenses in your taxable account a EF becomes redundant. My opinion. Personally I stopped carrying a specific EF when my Vanguard Brokerage account hit mid 6 figures.
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2tall4economy
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Re: Dry Powder…Am I thinking of this correctly?

Post by 2tall4economy »

your dry powder is your bond allocation (or stable value fund allocation) and "buying the dip" is known as rebalancing...

in my book other approaches are timing the market.
You can do anything you want in life. The rub is that there are consequences.
tomsense76
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Re: Dry Powder…Am I thinking of this correctly?

Post by tomsense76 »

I think others have already driven the point home of how emergency funds are used. So will skip that.

How much do you have saved? After a certain point, an emergency fund becomes optional. That said, if you decide to get rid of your emergency fund, you should really be comfortable with your asset allocation at that point as well as being able to sell in a downturn if needed. Would suggest reading this blogpost and possibly others for more details.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Kaktus
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Re: Dry Powder…Am I thinking of this correctly?

Post by Kaktus »

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
Many reflections already, but I think it could be emphasized that one's amount of savings in bonds is part of the question. I get the impression cash equivalent here does not include bonds because then this thread should or would be all about what AA of stocks-bonds to aim at. Bond funds are pretty liquid and generally don't drop as much as equity funds in a bear market. If one keeps to roughly a certain allocation to bonds, updating say twice a year, then one buys low and sells high as a matter of course. That simplyfies things significantly and has historically been statistically superior for the average person (who is not a professional, active Investor) compared to keeping lots of cash most of the time. The bond holdings can also be used in a particularly bad year when ones income dries up lowering the need for money in bank account.
There is also access to credit to factor in.
All this may be obvious but I thought this original binary question of "cash or equity market" (as I understood it) is too simplified and not in line with how most bogleheads approach it anyway to give really valid answers.
Reamus294
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Re: Dry Powder…Am I thinking of this correctly?

Post by Reamus294 »

I am not for saving cash to invest when there is a downturn. However, in a downturn I would reevaluate my cash needs to see if there is anything extra I can invest. Maybe I’m ok with driving a cheaper/older car longer so my car fund can go lower, or maybe my job stability is higher. Any amount invested would be considered like my other retirement funds and untouchable until FI.

I say this knowing it is is more efficient to evaluate your needs on an ongoing basis to get closer to dollar cost averaging and to take the emotion out of it, but sometimes we need a kick in the pants.
WhiteMaxima
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Re: Dry Powder…Am I thinking of this correctly?

Post by WhiteMaxima »

Your dry powder is not dry. It is wet by 5.4% every year base on CPI.
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