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Do you have ‘Dry Powder’ for unforeseen risks?

Do you have ‘Dry Powder’ for unforeseen risks?

keeping cash reserves handy for liquidity needs is a wise move for investors and companies alike
March 26, 2022
3 min read
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Do you have ‘Dry Powder’ for unforeseen risks?

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in the 17th century, soldiers always had loose gunpowder that needed to be kept absolutely dry to be effective in combat. as monarchy saw a steady decline, tools like dry powder were no longer used. instead, the word ‘dry powder’ came to be associated with keeping cash ready for emergencies. 

for stock market investors, keeping dry powder is the first lesson taught to ensure that they don’t pump in all their cash into shares. these are essentially highly liquid reserves that are set aside for unforeseen circumstances. 

there could be situations such as urgent home repairs, emergency travel, or hospitalisation, where waiting for cash settlement through equity sale is not an option. in these cases, holding ‘dry powder’ comes in handy. hence, it is advisable to not invest the entire disposable income into stocks and keep some money aside.

companies need it too

just like individuals, corporates also need reserves to meet future obligations. geo-political volatilities, taxation changes, and economic downturn are some of the factors that affect business revenues. 

here, having dry powder in the form of cash and short-term fixed-income assets that can be liquidated quickly is helpful. it ensures that the company can continue to pay the operating expenses, even if sales decline. 

in the startup world too, dry powder is a term used to describe the venture capital/private equity strategy to keep cash intact. this cash can be used to either invest in a new opportunity or provide additional funding to grow portfolio companies.

how much powder?

each person may have a different lifestyle and income. but it is advisable to keep a dry powder equal to 12 months of expenses. during a pay cut or unemployment, this ‘powder’ offers an adequate cash flow to pay for rent, food, and utilities. 

even though the stock market is slowly moving to a quicker settlement cycle, investors still need real cash for immediate needs. after all, you cannot pledge your stock to buy a flight ticket yet.