Channel members regularly get to see inside my pension
portfolio, and they see that I use the three
-bucket method for my pension investments. This
means that bucket one contains cash equivalent,
which for me is an ETF called the CSH2, and it's
a money market fund. Now, equity purists think
holding cash that earns less than the market
average is an anchor. holding your investments
back and i would argue pension investments difference
and that dry powder is essential hi i'm eric
from time to retire .co .uk i'll blaze pascal
a 17th century french mathematician and philosopher
famously observed that all of humanity's problems
stem from man's inability to sit quietly in a
room alone Now, Pascal was speaking of the human
condition, our desperate need for distraction,
but he might as well have been describing the
modern retail investor managing their self -invested
personal pension. The urge to do something in
a financial market is so powerful and usually
destructive that it's a prevailing assumption
that if money is not invested, it's not working,
that it must be deployed into equities, bonds,
real estate, or whatever speculative fervor is
currently gripping the imagination of the financial
press. To have capital sit in idle, or what appears
to be idle, is viewed almost as a moral failing,
a dereliction of your duty to oneself. And today
I want to discuss the underappreciated art of
doing nothing strategically now we're going to
discuss the importance of holding dry powder
specifically within money markets instruments
that's a vital component of a prudent pension
portfolio now we'll examine why this disdain
for cash which was entirely rational for the
last decade is now a bit more dangerous and we'll
look at the data specifically regarding sterling
money market funds like csh2 see why safety is
for the first and quite a long time paying actually
quite a good return now let us define our term
so what is dry powder now historically the term
referred to gunpowder that was kept dry and ready
for immediate use in battle now if your powder
was wet you must give was just an awkward club
Now, in finance, dry power debt refers to highly
liquid, risk -averse assets, usually cash or
cash equivalents that are held in reserve. It's
capital not currently exposed to the markets,
or maybe long -duration bond markets. Now, why
would a rational investor seeking to maximize
long -term pension growth hold an asset? that
historically offers lower returns than the stock
markets? Well, the answer lies in understanding
the difference between investment returns and
investment survival. Our markets are cyclical.
This is true, and everyone acknowledges this
intellectually, but few accept it emotionally.
We're currently living through a period of significant
asset price inflation, and this is driven by
years of... accommodative monetary policy followed
by a massive fiscal stimulus now a rush into
anything labeled ai now the behavioral bias at
play here is recency bias now investors assume
that immediate future will resemble the immediate
past when markets go up for five years the collected
memory of a 30 % drawdown fades now risk management
is viewed as a drag on performance, something
for pessimists and historians. But the precipice
always arrives. It arrives not when it's expected,
but when the maximum amount of leverage and complacency
has built up in the system. It arrives via a
shock, a geopolitical event, a banking failure,
a pandemic. force a violent repricing of risk
and when this happens equities fall corporate
credit spread widens and real estate liquidity
disappears now in a true crisis almost everything
gets sold often because leverage players are
receiving margin calls and they must sell whatever
they can to just stay solvent now this is the
moment when the investor fully invested in growth
assets suddenly realizes They are not an investor
at all. They're merely a passenger in a vehicle
with no brakes. Well, this is where dry powder
becomes the most valuable asset in your portfolio.
Its value is twofold, really, psychological and
strategic. Now, psychologically, holding a significant
cash buffer, perhaps 5%, 10%, or even 20 % of
a pension, depending on your age and risk tolerance,
prevents panic. When the S &P 500 is down 4 %
before your morning coffee, then looking at that
stable tranche of capital provides that kind
of emotional ballast necessary to avoid hitting
that sell button on some quality equities that
are now at the bottom of the market. So strategically,
dry powder is an op. So strategic. Strategically,
dry powder, it's a call option on the entire
market. When there's blood on the streets, as
the Rothschild once said, cash changes from being
a drag on performance to being king. In a crash,
liquidity is scarce. Those who have it demand
a premium for providing it. And having dry powder
allows you to be the buyer when for -sellers
are dumping high -quality assets at distressed
prices. You're not buying because you're smart.
You're buying because you're liquid. You are
providing liquidity to a market that's actually
gasping for it. And you'll be rewarded, hopefully,
for that service when normalization returns.
Now, without dry powder, you're merely a spectator
to this opportunity. You're paralyzed by your
own depreciating portfolio. Of course. the astute
counter argument to this is that cash is trash
and for nearly 15 years following the great finance
crisis that argument was kind of correct central
banks engage in this zero interest rate policy
and even in europe a negative interest rate policy
and if you held cash in your pension during that
era you were literally losing purchasing power
every single day the real yield which is the
The rate you would get minus inflation was deeply
negative. Central bankers engineered an environment
where there was no alternative to taking risks.
You were forced out the risk curve just to stand
still. Now, that year was over. The inflation
spike of the early 2020s forced central banks
to normalise rates, and we've returned to a world
where money has a cost, and conversely, where
savings are rewarded. So let's have a look at
the data specifically for UK -based pension investors.
Now, we need an instrument that's highly liquid,
extremely low risk, and tracks the central bank
rate. A prime example for sterile investors,
one that I use, although I'm not a financial
advisor, I wouldn't recommend. any product to
anyone. I use the Amundi Smart Cash ETF, which
is ticker symbol CSH2. Now, this ETF doesn't
try to be too clever. It's designed to track
the Sonia rate, and that's the sterling overnight
index average. And this is effectively risk -free
for UK. It holds a very short -term financial
instrument by largely reverse -purchased agreements,
and they're collateralized by government bonds.
It's as close to pure liquidity as you can get
in an ETF. Now, as we sit here today, let's assume
we're looking at the trailing 12 months data
leading into 2026. Now, the landscape has shifted
dramatically from those zero interest rate era
days. While rates may fluctuate, the Sonya rate
and thus the yield on investments like the CSH2
is recently... been hovering around the 5 % mark
on an annualized basis. Now, let's compare this
to inflation. The UK CPI, having come down from
double digits, is currently sitting around 2
.5%. So, to the max, you get a 5 % nominal yield,
less a 2 .5 % inflation rate. Gives you a yield,
positively, of 2 .5%. This is profound for the
first time in a generation. You can hold a risk
-free asset in your pension, sleep soundly at
night, knowing it's not going to drop 30 % because
of an Elon Musk tweet, and still increase your
purchasing power and real terms. You're no longer
paying a penalty for safety. You're being paid
to wait. not to beat the market every year. The
goal is to ensure that you have enough capital
to survive your retirement. Now, the investment
industry is built on selling you these complex,
constant activity around your investments. They
want you fully invested, fully margined, and
churn your portfolio regularly. But the sophisticated
investor understands that portfolio construction
is a balance. It's about preparing for various
future states of the world, not just the optimistic
one that's currently placed into equities. Now,
holding dry powder in a money market vehicle,
the CSH2 currently pays you a positive real return
while you wait for that inevitable market dislocation.
It's the insurance that pays you a dividend.
Now, when the crash comes, and it will come,
The vast majority of investors will be desperately
trying to find an exit. If you've maintained
your discipline and your dry powder, you could
be the one calmly walking into the entrance.
Now this is not being timid. This is strategy.
And remember, I'm no financial investor. Now,
market crashes are a feature, not a bug of capitalism.
They are necessary, albeit painful, and they're
a process of creative destruction and repricing.
Now, while many see them as inevitable for the
prepared investor, they're a predictable opportunity.
You can use volatility to build wealth by being
ready when others aren't. Keep your powders rye.
Maintain a longer perspective. Be disciplined
in your approach. It's not about being clever.
It's about being rational when everyone else
is being emotional. As always, this is for entertainment
purposes and certainly should never be construed
as financial advice. Make sure you consult a
professional. Have a great day. Talk to you soon.