WEBVTT 00:00:03.049 --> 00:00:06.589 Channel members regularly get to see inside my pension 00:00:06.589 --> 00:00:10.330 portfolio, and they see that I use the three 00:00:10.330 --> 00:00:13.929 -bucket method for my pension investments. This 00:00:13.929 --> 00:00:17.350 means that bucket one contains cash equivalent, 00:00:17.570 --> 00:00:22.030 which for me is an ETF called the CSH2, and it's 00:00:22.030 --> 00:00:27.829 a money market fund. Now, equity purists think 00:00:27.829 --> 00:00:30.989 holding cash that earns less than the market 00:00:30.989 --> 00:00:33.859 average is an anchor. holding your investments 00:00:33.859 --> 00:00:37.539 back and i would argue pension investments difference 00:00:37.539 --> 00:00:43.259 and that dry powder is essential hi i'm eric 00:00:43.259 --> 00:00:48.240 from time to retire .co .uk i'll blaze pascal 00:00:48.240 --> 00:00:52.060 a 17th century french mathematician and philosopher 00:00:52.060 --> 00:00:56.219 famously observed that all of humanity's problems 00:00:56.219 --> 00:01:00.759 stem from man's inability to sit quietly in a 00:01:00.759 --> 00:01:05.310 room alone Now, Pascal was speaking of the human 00:01:05.310 --> 00:01:08.750 condition, our desperate need for distraction, 00:01:09.030 --> 00:01:12.629 but he might as well have been describing the 00:01:12.629 --> 00:01:16.709 modern retail investor managing their self -invested 00:01:16.709 --> 00:01:21.890 personal pension. The urge to do something in 00:01:21.890 --> 00:01:24.730 a financial market is so powerful and usually 00:01:24.730 --> 00:01:28.609 destructive that it's a prevailing assumption 00:01:28.609 --> 00:01:33.480 that if money is not invested, it's not working, 00:01:33.640 --> 00:01:36.780 that it must be deployed into equities, bonds, 00:01:37.060 --> 00:01:40.500 real estate, or whatever speculative fervor is 00:01:40.500 --> 00:01:42.560 currently gripping the imagination of the financial 00:01:42.560 --> 00:01:47.219 press. To have capital sit in idle, or what appears 00:01:47.219 --> 00:01:50.719 to be idle, is viewed almost as a moral failing, 00:01:50.840 --> 00:01:55.480 a dereliction of your duty to oneself. And today 00:01:55.480 --> 00:02:00.040 I want to discuss the underappreciated art of 00:02:00.319 --> 00:02:02.920 doing nothing strategically now we're going to 00:02:02.920 --> 00:02:05.819 discuss the importance of holding dry powder 00:02:05.819 --> 00:02:09.360 specifically within money markets instruments 00:02:09.360 --> 00:02:13.379 that's a vital component of a prudent pension 00:02:13.379 --> 00:02:18.340 portfolio now we'll examine why this disdain 00:02:18.340 --> 00:02:21.460 for cash which was entirely rational for the 00:02:21.460 --> 00:02:24.719 last decade is now a bit more dangerous and we'll 00:02:24.719 --> 00:02:28.379 look at the data specifically regarding sterling 00:02:28.379 --> 00:02:32.740 money market funds like csh2 see why safety is 00:02:32.740 --> 00:02:36.599 for the first and quite a long time paying actually 00:02:36.599 --> 00:02:41.539 quite a good return now let us define our term 00:02:41.539 --> 00:02:48.860 so what is dry powder now historically the term 00:02:48.860 --> 00:02:52.719 referred to gunpowder that was kept dry and ready 00:02:52.719 --> 00:02:55.520 for immediate use in battle now if your powder 00:02:55.520 --> 00:02:58.840 was wet you must give was just an awkward club 00:02:59.229 --> 00:03:03.030 Now, in finance, dry power debt refers to highly 00:03:03.030 --> 00:03:07.169 liquid, risk -averse assets, usually cash or 00:03:07.169 --> 00:03:10.569 cash equivalents that are held in reserve. It's 00:03:10.569 --> 00:03:15.550 capital not currently exposed to the markets, 00:03:15.710 --> 00:03:21.770 or maybe long -duration bond markets. Now, why 00:03:21.770 --> 00:03:24.770 would a rational investor seeking to maximize 00:03:24.770 --> 00:03:27.699 long -term pension growth hold an asset? that 00:03:27.699 --> 00:03:30.520 historically offers lower returns than the stock 00:03:30.520 --> 00:03:33.419 markets? Well, the answer lies in understanding 00:03:33.419 --> 00:03:36.879 the difference between investment returns and 00:03:36.879 --> 00:03:40.020 investment survival. Our markets are cyclical. 00:03:40.120 --> 00:03:43.919 This is true, and everyone acknowledges this 00:03:43.919 --> 00:03:46.740 intellectually, but few accept it emotionally. 00:03:47.199 --> 00:03:50.680 We're currently living through a period of significant 00:03:50.680 --> 00:03:55.319 asset price inflation, and this is driven by 00:03:55.319 --> 00:03:59.280 years of... accommodative monetary policy followed 00:03:59.280 --> 00:04:03.759 by a massive fiscal stimulus now a rush into 00:04:03.759 --> 00:04:08.680 anything labeled ai now the behavioral bias at 00:04:08.680 --> 00:04:13.120 play here is recency bias now investors assume 00:04:13.120 --> 00:04:16.319 that immediate future will resemble the immediate 00:04:16.319 --> 00:04:19.699 past when markets go up for five years the collected 00:04:19.699 --> 00:04:25.139 memory of a 30 % drawdown fades now risk management 00:04:25.759 --> 00:04:28.300 is viewed as a drag on performance, something 00:04:28.300 --> 00:04:33.480 for pessimists and historians. But the precipice 00:04:33.480 --> 00:04:37.319 always arrives. It arrives not when it's expected, 00:04:37.579 --> 00:04:41.639 but when the maximum amount of leverage and complacency 00:04:41.639 --> 00:04:46.540 has built up in the system. It arrives via a 00:04:46.540 --> 00:04:50.360 shock, a geopolitical event, a banking failure, 00:04:50.500 --> 00:04:58.800 a pandemic. force a violent repricing of risk 00:04:58.800 --> 00:05:01.920 and when this happens equities fall corporate 00:05:01.920 --> 00:05:04.839 credit spread widens and real estate liquidity 00:05:04.839 --> 00:05:08.720 disappears now in a true crisis almost everything 00:05:08.720 --> 00:05:11.959 gets sold often because leverage players are 00:05:11.959 --> 00:05:15.120 receiving margin calls and they must sell whatever 00:05:15.120 --> 00:05:18.439 they can to just stay solvent now this is the 00:05:18.439 --> 00:05:22.040 moment when the investor fully invested in growth 00:05:22.040 --> 00:05:25.649 assets suddenly realizes They are not an investor 00:05:25.649 --> 00:05:29.029 at all. They're merely a passenger in a vehicle 00:05:29.029 --> 00:05:35.269 with no brakes. Well, this is where dry powder 00:05:35.269 --> 00:05:38.050 becomes the most valuable asset in your portfolio. 00:05:38.750 --> 00:05:42.589 Its value is twofold, really, psychological and 00:05:42.589 --> 00:05:46.269 strategic. Now, psychologically, holding a significant 00:05:46.269 --> 00:05:49.670 cash buffer, perhaps 5%, 10%, or even 20 % of 00:05:49.670 --> 00:05:52.389 a pension, depending on your age and risk tolerance, 00:05:52.550 --> 00:05:56.930 prevents panic. When the S &P 500 is down 4 % 00:05:56.930 --> 00:06:00.490 before your morning coffee, then looking at that 00:06:00.490 --> 00:06:03.889 stable tranche of capital provides that kind 00:06:03.889 --> 00:06:07.089 of emotional ballast necessary to avoid hitting 00:06:07.089 --> 00:06:10.889 that sell button on some quality equities that 00:06:10.889 --> 00:06:14.310 are now at the bottom of the market. So strategically, 00:06:14.509 --> 00:06:23.519 dry powder is an op. So strategic. Strategically, 00:06:23.540 --> 00:06:27.000 dry powder, it's a call option on the entire 00:06:27.000 --> 00:06:29.540 market. When there's blood on the streets, as 00:06:29.540 --> 00:06:33.060 the Rothschild once said, cash changes from being 00:06:33.060 --> 00:06:37.199 a drag on performance to being king. In a crash, 00:06:37.439 --> 00:06:40.040 liquidity is scarce. Those who have it demand 00:06:40.040 --> 00:06:43.319 a premium for providing it. And having dry powder 00:06:43.319 --> 00:06:46.939 allows you to be the buyer when for -sellers 00:06:46.939 --> 00:06:49.279 are dumping high -quality assets at distressed 00:06:49.279 --> 00:06:51.939 prices. You're not buying because you're smart. 00:06:52.079 --> 00:06:54.519 You're buying because you're liquid. You are 00:06:54.519 --> 00:06:57.420 providing liquidity to a market that's actually 00:06:57.420 --> 00:07:00.920 gasping for it. And you'll be rewarded, hopefully, 00:07:01.040 --> 00:07:04.319 for that service when normalization returns. 00:07:04.860 --> 00:07:08.240 Now, without dry powder, you're merely a spectator 00:07:08.240 --> 00:07:12.839 to this opportunity. You're paralyzed by your 00:07:12.839 --> 00:07:20.019 own depreciating portfolio. Of course. the astute 00:07:20.019 --> 00:07:25.000 counter argument to this is that cash is trash 00:07:25.000 --> 00:07:28.399 and for nearly 15 years following the great finance 00:07:28.399 --> 00:07:31.220 crisis that argument was kind of correct central 00:07:31.220 --> 00:07:34.920 banks engage in this zero interest rate policy 00:07:34.920 --> 00:07:38.839 and even in europe a negative interest rate policy 00:07:38.839 --> 00:07:41.100 and if you held cash in your pension during that 00:07:41.100 --> 00:07:44.720 era you were literally losing purchasing power 00:07:44.720 --> 00:07:48.379 every single day the real yield which is the 00:07:48.920 --> 00:07:51.480 The rate you would get minus inflation was deeply 00:07:51.480 --> 00:07:54.740 negative. Central bankers engineered an environment 00:07:54.740 --> 00:07:58.139 where there was no alternative to taking risks. 00:07:58.600 --> 00:08:03.180 You were forced out the risk curve just to stand 00:08:03.180 --> 00:08:06.079 still. Now, that year was over. The inflation 00:08:06.079 --> 00:08:09.120 spike of the early 2020s forced central banks 00:08:09.120 --> 00:08:12.360 to normalise rates, and we've returned to a world 00:08:12.360 --> 00:08:15.920 where money has a cost, and conversely, where 00:08:15.920 --> 00:08:19.269 savings are rewarded. So let's have a look at 00:08:19.269 --> 00:08:23.649 the data specifically for UK -based pension investors. 00:08:24.389 --> 00:08:27.430 Now, we need an instrument that's highly liquid, 00:08:27.550 --> 00:08:31.490 extremely low risk, and tracks the central bank 00:08:31.490 --> 00:08:35.309 rate. A prime example for sterile investors, 00:08:35.649 --> 00:08:39.129 one that I use, although I'm not a financial 00:08:39.129 --> 00:08:42.009 advisor, I wouldn't recommend. any product to 00:08:42.009 --> 00:08:46.710 anyone. I use the Amundi Smart Cash ETF, which 00:08:46.710 --> 00:08:50.549 is ticker symbol CSH2. Now, this ETF doesn't 00:08:50.549 --> 00:08:52.909 try to be too clever. It's designed to track 00:08:52.909 --> 00:08:55.730 the Sonia rate, and that's the sterling overnight 00:08:55.730 --> 00:08:59.309 index average. And this is effectively risk -free 00:08:59.309 --> 00:09:03.370 for UK. It holds a very short -term financial 00:09:03.370 --> 00:09:07.490 instrument by largely reverse -purchased agreements, 00:09:07.789 --> 00:09:09.990 and they're collateralized by government bonds. 00:09:10.549 --> 00:09:13.710 It's as close to pure liquidity as you can get 00:09:13.710 --> 00:09:18.470 in an ETF. Now, as we sit here today, let's assume 00:09:18.470 --> 00:09:21.110 we're looking at the trailing 12 months data 00:09:21.110 --> 00:09:25.309 leading into 2026. Now, the landscape has shifted 00:09:25.309 --> 00:09:29.289 dramatically from those zero interest rate era 00:09:29.289 --> 00:09:33.570 days. While rates may fluctuate, the Sonya rate 00:09:33.570 --> 00:09:36.350 and thus the yield on investments like the CSH2 00:09:36.350 --> 00:09:39.700 is recently... been hovering around the 5 % mark 00:09:39.700 --> 00:09:43.679 on an annualized basis. Now, let's compare this 00:09:43.679 --> 00:09:48.480 to inflation. The UK CPI, having come down from 00:09:48.480 --> 00:09:51.139 double digits, is currently sitting around 2 00:09:51.139 --> 00:09:56.419 .5%. So, to the max, you get a 5 % nominal yield, 00:09:56.600 --> 00:10:00.980 less a 2 .5 % inflation rate. Gives you a yield, 00:10:01.019 --> 00:10:05.379 positively, of 2 .5%. This is profound for the 00:10:05.379 --> 00:10:08.779 first time in a generation. You can hold a risk 00:10:08.779 --> 00:10:12.539 -free asset in your pension, sleep soundly at 00:10:12.539 --> 00:10:15.519 night, knowing it's not going to drop 30 % because 00:10:15.519 --> 00:10:19.139 of an Elon Musk tweet, and still increase your 00:10:19.139 --> 00:10:22.559 purchasing power and real terms. You're no longer 00:10:22.559 --> 00:10:26.240 paying a penalty for safety. You're being paid 00:10:26.240 --> 00:10:35.769 to wait. not to beat the market every year. The 00:10:35.769 --> 00:10:39.029 goal is to ensure that you have enough capital 00:10:39.029 --> 00:10:42.370 to survive your retirement. Now, the investment 00:10:42.370 --> 00:10:46.070 industry is built on selling you these complex, 00:10:46.190 --> 00:10:50.230 constant activity around your investments. They 00:10:50.230 --> 00:10:53.289 want you fully invested, fully margined, and 00:10:53.289 --> 00:10:57.730 churn your portfolio regularly. But the sophisticated 00:10:57.730 --> 00:11:01.509 investor understands that portfolio construction 00:11:01.509 --> 00:11:05.600 is a balance. It's about preparing for various 00:11:05.600 --> 00:11:09.480 future states of the world, not just the optimistic 00:11:09.480 --> 00:11:13.820 one that's currently placed into equities. Now, 00:11:13.860 --> 00:11:15.899 holding dry powder in a money market vehicle, 00:11:16.179 --> 00:11:20.940 the CSH2 currently pays you a positive real return 00:11:20.940 --> 00:11:25.080 while you wait for that inevitable market dislocation. 00:11:25.159 --> 00:11:28.159 It's the insurance that pays you a dividend. 00:11:28.519 --> 00:11:30.899 Now, when the crash comes, and it will come, 00:11:31.389 --> 00:11:35.029 The vast majority of investors will be desperately 00:11:35.029 --> 00:11:38.889 trying to find an exit. If you've maintained 00:11:38.889 --> 00:11:43.490 your discipline and your dry powder, you could 00:11:43.490 --> 00:11:45.950 be the one calmly walking into the entrance. 00:11:46.269 --> 00:11:51.429 Now this is not being timid. This is strategy. 00:11:52.549 --> 00:11:58.419 And remember, I'm no financial investor. Now, 00:11:58.419 --> 00:12:01.799 market crashes are a feature, not a bug of capitalism. 00:12:02.220 --> 00:12:06.419 They are necessary, albeit painful, and they're 00:12:06.419 --> 00:12:09.940 a process of creative destruction and repricing. 00:12:10.039 --> 00:12:13.679 Now, while many see them as inevitable for the 00:12:13.679 --> 00:12:20.120 prepared investor, they're a predictable opportunity. 00:12:20.740 --> 00:12:24.519 You can use volatility to build wealth by being 00:12:24.519 --> 00:12:27.580 ready when others aren't. Keep your powders rye. 00:12:28.139 --> 00:12:30.600 Maintain a longer perspective. Be disciplined 00:12:30.600 --> 00:12:32.940 in your approach. It's not about being clever. 00:12:33.320 --> 00:12:35.720 It's about being rational when everyone else 00:12:35.720 --> 00:12:40.919 is being emotional. As always, this is for entertainment 00:12:40.919 --> 00:12:43.779 purposes and certainly should never be construed 00:12:43.779 --> 00:12:46.539 as financial advice. Make sure you consult a 00:12:46.539 --> 00:12:49.240 professional. Have a great day. Talk to you soon.