What Does It Mean To Have Dry Powder in the Financial World?

In the financial realm, the term dry powder is a euphemism that primarily refers to the cash reserves an individual company proactively maintains so that it can meet its obligations during times of economic stress. A company may step up its campaign to build up its dry powder levels if it anticipates difficult conditions on the proverbial horizon.

Dry powder may also apply to individual investors. In this context, the term similarly refers to cash reserves but may also encompass other liquid assets, such as money market funds that an investor may set aside for investment purposes.

Financial advisors often discourage their clients from investing 100% of their assets in the stock market, stressing the importance of maintaining a healthy percentage of dry powder as a preemptive measure against potential market corrections. Not only can dry powder reserves offer emergency funds during periods of steep market decline, but investors may also funnel these funds towards purchasing devalued stocks, capturing them at bargain-basement prices.

This latter usage enables the strategy of dollar-cost averaging, an investment model where investors make fixed dollar amounts of periodic stock purchases—regardless of the share price. When prices are low, more shares may be purchased. If prices are higher, fewer shares may be purchased for the same dollar amount invested.

This strategy eliminates the temptation to time the market in an attempt to lock in the best prices of equities, which is viewed as a losing prospect. Dollar-cost averaging fundamentally reduces volatility and depends on liquid reserves of investible assets that dry powder provides.

Etymology of Dry Powder

The origins of the phrase “dry powder” hearken back to the 17th century, when military battles were fought with guns and cannons that utilized loose gunpowder in combat. In order for it to remain effective, the gunpowder had to be kept dry. Consequently, having stores of dry powder readily available was essential to keeping weapons functioning optimally. Hence, equating dry powder with reserves that can keep companies solvent, or position investors to stay financially sound in down markets, entered the financial lexicon.