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I’ve recently lived by the principle of keeping about 20% of my assets in cash as a safety net—not as “dry powder” ready to be fired off in some speculative move. But lately, I’ve caught myself eyeing that safety net differently, wondering if it could be more than just a cushion. Am I starting to see it as dry powder after all?
I keep hearing the word “play” tossed around in financial circles. “What’s your play?” they ask. To me, “play” sounds like something you’d hear at a poker table, not a portfolio review. It reeks of gambling, not investing.
Here’s the math that’s been spinning in my head: If the markets drop 25% and I invest $100 from my cash reserve, I could see a profit of about $33 if prices climb back to where they started. That’s a tidy gain. But what if the markets don’t stop falling? Another 25% drop after I buy means I’m down $25, and suddenly my safety net isn’t looking so safe anymore. I’ve chipped away at my buffer for a shot at a win.
Is this the investor’s dilemma—balancing risk and reward—or the gambler’s itch, chasing a thrill? I can’t quite tell.
Then I look at the S&P 500 chart, stretching back decades. It’s a steady march up and to the right. Always has been. That long-term optimism whispers reassurance. But a nagging voice counters: What if this time is different?
Maybe I should dip a toe in—say, $50 instead of $100. But even that feels like I’m turning my safety net into dry powder, bit by bit. If I start this game, where does it stop? How do I know when I’ve crossed the line from prudence to recklessness?
So here I am, asking: What should we do?
Ecclesiastes 7:12 offers a steadying hand:
“Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this: Wisdom preserves those who have it.”
Maybe the real answer isn’t in the numbers or the charts, but in the wisdom to know when to hold tight—and when to let go.
WDH
One of the moderators in my retirement planning FB group is a young, but wise beyond his years, financial planner. He suggests that each dollar in one’s portfolio should not only have a defined purpose but a use-by date. He, and others, emphasize the importance of a having a financial plan first. Both of these principles seem to increasingly resonate with many folks including myself. We have a financial plan, a retirement income strategy and a portfolio with an asset allocation. Our money market “cash” is our annual spend. We typically also have 1 or 2 short term T-Bills or CDs for the shorter rungs on our retirement income ladder.
Context matters in these situations. If you have a long time before you need the funds, it might be worth considering. However, you earmarked these funds as ‘emergency’ for a reason. What’s changed other than events that you have no control over?
I’ve mulled over the same thing, except I have a safety net of cash, and a dry powder cash reserve in my investment account. Could that all be a safety net instead? Or is my safety net large enough that I can actually boost my reserves of dry powder? I’m not actually thinking of buying right now, but I’m sure there will be cause to do so over the next several months. It’s an interesting question though, because I do derive a lot of safety and comfort from my cash positions.
What is your asset allocation, and how far off are you, if at all? My target is 50% stocks. When I took my RMDs last October I was up to 54% stocks so I rebalanced as I was moving money in any case. If I find that I’m down to 45% stocks I will seriously consider buying, but that does require that I look.
Just my opinion William, I would not do anything different than what you have been doing. I would not transfer safety net money into the market. We always have some excess cash flow, and make monthly deposits to the brokerage account. We will continue to do that without regard to current events. Again, those deposits don’t come from our safety net.
I agree. I could see us reallocating from bonds to stocks if drawdowns in the latter got that severe, but I wouldn’t see us investing anything we consider a safety net.
You got to know when to hold ’em
Know when to fold ’em
Kenny Rogers song sprung to my mind reading your post. I would guess the answer of what to do is different for each of us.
I worry that for some young investors that the recent turmoil in the stock market will color their investments decisions going forward to their long term detriment.