Dry Powder in a Wet Blanket
Posted: Wed Dec 07, 2011 3:37 pm
As my different investment/cash accounts have built value over the years, along with managing some of my parents' stuff, something has really bothered me regarding cash balances.
Often, a cash balance is in what I have to assume to be in a MM fund that has the double-whammy of paying little/no interest as it sits in a typical IRA or HSA broker account waiting to be invested. This is obviously a poor choice, but it got me thinking that every cash balance should have a streamed line to some sort of emergency or need for "dry powder." If it's not in a position to do so, I don't think you can call it "dry powder."
Rarely does the PP itself provide massive opportunities that cash has to come into the picture to take advantage of... yes, we'll use the cash portion to rebalance, but for the most part the other 3 assets run a pretty smooth machine. It's more often in our daily lives that we need that "dry powder"... whether it's that medical bill, the great Craigslist camper steal, the new tranny you have to get put into your car, the car your uncle is selling "right now" at a bargain, etc. Most of this could be temporarily serviced by a line of credit, but 9%-15% interest isn't ideal... we like to keep a cash-cushion.
This is why I'm getting more and more annoyed with "dry powder" that appears to have an inaccessability, or a "wet blanket" around it.
I think for all of our cash accounts, not only shoud we be looking at whether or not it's safe enough (physical vs treasury vs FDIC vs MM) to hold its nominal balance, but what real flexibility we have to use it in a pinch?! A treasury MM account holed up in a 401(k) with really poor investing options is about the worst place I can imagine having "dry powder," even if interest rates get high enough where the tax-efficiency starts to become a more important factor again. What are you going to do with it? Withdraw it and pay taxes and penalty? Reinvest in some crappy high-expense stock mutual fund (we KNOW they won't have gold or LTT's)? Wait until your 59.5 to use your "dry powder?" It's like pulling a square peg out of a round hole.
Psychologically, the random "cash balances" my parents have that are in IRA's we're trying to roll over or in the form of "cash soon-to-be" loans they have to my sister and family are more of a headache than anything... meanwhile, the $5k I have sitting in my safe feels really good to have. It feels so liquid... like such dry powder ready to explode the second I need it to. It's not even that much but it makes me feel 10x better about the rest of the money I have out there in riskier assets and in retirement accounts.
I think we have to make sure that we're actually keeping our dry powder dry. It's amazing how long a couple weeks can feel like when trying to get random accounts liquidated or rolled-over.
Often, a cash balance is in what I have to assume to be in a MM fund that has the double-whammy of paying little/no interest as it sits in a typical IRA or HSA broker account waiting to be invested. This is obviously a poor choice, but it got me thinking that every cash balance should have a streamed line to some sort of emergency or need for "dry powder." If it's not in a position to do so, I don't think you can call it "dry powder."
Rarely does the PP itself provide massive opportunities that cash has to come into the picture to take advantage of... yes, we'll use the cash portion to rebalance, but for the most part the other 3 assets run a pretty smooth machine. It's more often in our daily lives that we need that "dry powder"... whether it's that medical bill, the great Craigslist camper steal, the new tranny you have to get put into your car, the car your uncle is selling "right now" at a bargain, etc. Most of this could be temporarily serviced by a line of credit, but 9%-15% interest isn't ideal... we like to keep a cash-cushion.
This is why I'm getting more and more annoyed with "dry powder" that appears to have an inaccessability, or a "wet blanket" around it.
I think for all of our cash accounts, not only shoud we be looking at whether or not it's safe enough (physical vs treasury vs FDIC vs MM) to hold its nominal balance, but what real flexibility we have to use it in a pinch?! A treasury MM account holed up in a 401(k) with really poor investing options is about the worst place I can imagine having "dry powder," even if interest rates get high enough where the tax-efficiency starts to become a more important factor again. What are you going to do with it? Withdraw it and pay taxes and penalty? Reinvest in some crappy high-expense stock mutual fund (we KNOW they won't have gold or LTT's)? Wait until your 59.5 to use your "dry powder?" It's like pulling a square peg out of a round hole.
Psychologically, the random "cash balances" my parents have that are in IRA's we're trying to roll over or in the form of "cash soon-to-be" loans they have to my sister and family are more of a headache than anything... meanwhile, the $5k I have sitting in my safe feels really good to have. It feels so liquid... like such dry powder ready to explode the second I need it to. It's not even that much but it makes me feel 10x better about the rest of the money I have out there in riskier assets and in retirement accounts.
I think we have to make sure that we're actually keeping our dry powder dry. It's amazing how long a couple weeks can feel like when trying to get random accounts liquidated or rolled-over.