Is Dry Powder Hurting Your Returns?

Jason’s Random Words

The reason we invest is to make sure we have enough wealth for financial goals. Financial goals are simply measuring sticks that exist to represent how much asset stuff we have accumulated that we can turn into money when we need that money in the real world.

I’ve already written about how I’m using bonds but I want to look at my cash strategy, too. We are in a strange and rare place with cash, where you can get a yield between 3-4% pretty easily and safely, and for that yield to actually outpace inflation. This isn’t common.

Yet at the same time, that yield pales in comparison to both the long-term average returns on compounding assets like stocks, the yields you can earn on fixed-income assets like investment-grade bonds, and real estate investment trusts (REITs).

So what purpose cash?

• Protecting against downside risk when you’re only a few years or less from needing cash.

• Dry powder for opportunistic buying of better-return long-term assets like stocks.

So here we are, about five months into 2025. At this writing, the S&P 500 is about where it started the year. However, it’s also been up as much as 5% from where it started, and down almost 20% from the high before the recent rally.

In other words, we have come through a period when, according to my guidelines around cash — deploy some of it when the market falls 10% or more from a recent high — I should have done such.

Let’s check the record. In early April I held about 28% cash. A significant portion of that cash is held to cover puts that I have sold, as well as from my annual solo 401K contribution as part of my tax planning. But even factoring for those two things, that was a significant amount of cash, and not the favorable mix I aim to have.

What about now?

About six weeks later, and my total cash across all of the investment accounts I manage is about 12%, including cash reserved for puts. Starting on about April 9, I began buying, adding to some of my favorite stocks, many of which were down more than the market, and that I have strong conviction in.

I still have a little more cash than I usually would, but I feel like I’m comfortable where it is. I also feel like I have done a pretty good job utilizing cash for the reason I keep some around, i.e. when there are opportunities like this.

I know a few investors who have actually seen their cash positions grow over the past couple of months. I don’t know what happens with the stock market later this year — I have sold some stocks and I still have that put I bought that shorts the market — but I know my strategy around cash says I buy what I like the most when the market sells off. So I did, and I think it will work for me in the long run.

If you’re a subscriber to our Starter Position membership on Patreon, I’d love to hear how you think about and use cash over on our Discord server. I’ll start up a conversation in our “I Did a Thing” channel once this publishes. If you’re not already a member, go to https://www.patreon.com/investingpod and check it out.

If you’re not a member and don’t intend to, but want to share your thoughts, reply to this post, or check out the free Patreon and comment on this post there.

Jason

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