Dry powder

Capital committed to a strategy but deliberately not yet deployed, held so that a future opportunity can be acted on.

Example

Holding 20% of a portfolio in cash specifically so that a large market decline can be bought into.

Important

It is not free. Cash earning less than the rest of the portfolio has an annual cost you can calculate, and a reserve with no written trigger for spending it tends to be deployed after the opportunity rather than during it.

Related terms

  • Reserve ratio — The split of a strategy's total capital between first positions and money held back for later investment in holdings you already own.
  • Opportunity cost — What you give up by choosing one use of your money, or time, over the next-best alternative.
  • Liquidity — How quickly and cheaply an asset can be converted to cash without moving its own price.

Lessons that explain it

  • If you invest everything in first cheques, you cannot back your winners — Planning reserves for follow-on investments before making initial investments protects your ability to support your best companies and to maintain ownership where it matters most. (11 min)
  • Write the follow-on policy before the requests arrive — Deciding in advance what would earn more capital removes the pressure, relationships and urgency that distort follow-on decisions when a request is already on the table. (10 min)
  • Every yes spends money that could have gone somewhere else — An investment decision is a comparison with alternatives: another deal, a follow-on in an existing holding, keeping reserves, or not investing at all. Naming the alternative clarifies the decision. (9 min)
  • Reserves and dry powder: the money you deliberately do not invest — Holding capital back looks like indecision and is frequently the most consequential decision in the portfolio. It is also not free, and the honest version of the argument prices both sides. (13 min)
  • Cash is a decision, not the absence of one — Holding cash has a cost measured against what else the money could earn, and a value in optionality and sleep. Sizing it deliberately is part of portfolio construction rather than what is left over. (10 min)

All 578 terms in the Investing glossary