Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Money-Markets, CDs, and Bonds: The Ups and Downs of Stashing Your Cash

Personal_Finance / Savings Accounts Jan 26, 2012 - 07:29 AM GMT

By: Money_Morning

Personal_Finance

Best Financial Markets Analysis ArticleDon Miller writes: In today's volatile markets many investors are faced with the same troublesome question - "Where should I park my cash?"

In fact, investors have withdrawn a net total of $328 billion from the stock market since 2007, according to Strategic Insight.

Ever since, a big portion that cash has been looking for a home.


It seems simple enough, but investors are finding the answer to be more complicated than they imagined...

Thanks to our friends at the Federal Reserve, interest rates are at record lows. In fact, they're so low that most investors are getting practically nothing in returns.

Meanwhile, the stock market has put on a New Year's rally, rewarding those who were willing to jump in while leaving cautious investors wondering if they're holding too much boring old cash.

However, in order to have an adequate safety net, your cash on hand should be enough to cover about a year's worth of expenses, according to Shah Gilani, a retired hedge fund manager and Editor of the acclaimed Wall Street Insights & Indictments newsletter.

"That's a good safety net," Shah says.

But no matter how much cash you hold, you still have to balance your need for higher returns against your risk tolerance.

Because whether you're thinking "safety first" or are tempted to reach for a little more yield, the choice you make might determine whether you're able to sleep at night.

Three Places to Park Your Cash
With that in mind, here's a look at three of the most popular places to park your cash.

Money Market Mutual Funds: Average one-year return: 0.04%.

Despite their current low yields, money-market mutual funds (MMMFs) tend to make sense for investors who want to be able to move into the stock or bond market at a moment's notice.

In that sense, MMMFs are liquid.

What's more, with a money market fund, you access your money quickly by writing checks or using an ATM card.

Most mutual fund families and brokerages offer "sweep" accounts, which automatically move money from stock and bond sales into MMMFs.

These funds currently hold approximately $3.2 trillion of investors' money in highly liquid securities like certificates of deposit and government securities, according to Bloomberg News.

But unlike bank deposits, MMMFs are not insured by the Federal Deposit Insurance Corp. (FDIC).

That's a key point that is lost on most investors. These funds can "break the buck," potentially exposing investors to loss of principal.

In fact, when Lehman Brothers Holdings Inc. failed on Sept. 15, 2008, the Reserve Primary Fund was stuck with $785 million of worthless commercial paper, leaving it without enough assets to cover its investors.

This announcement sparked a run on the fund, as people raced to withdraw their money before it was too late.

The panic soon spread to other money-market funds as investors pulled $400 billion out of the money-markets in less than two weeks.

The situation was finally defused only after the Fed and the U.S. Treasury promised to backstop the entire industry.

Now with the Eurozone in a similar liquidity crunch, the largest U.S. funds have moved aggressively to reduce their exposure to European debt by shedding their investments in euro- region banks, Bloomberg reports.

Still, the 2008 debacle was a stark reminder that danger can lurk in even the most conservative portfolios.

Bank Certificates of Deposit (CDs): Average yield on one-year CD: 0.44%.

CDs are debt instruments with a specific maturity, which run anywhere from three months to five years. CDs are considered to be safe because most are offered by banks, where they are insured for up to $250,000 by the FDIC.

But in order to get the best rates you have to deal with the old bugaboos: longer maturities and early-withdrawal penalties.

For instance, you can get 0.99% on a one-year CD according to Bankrate.com. Or you can bump the rate up to 1.8%, by locking your money up for five years. You can choose to redeem the CD early, but you'll have to pay a penalty.

So while CDs may pay more than money markets, your cash is essentially off-limits until the CD matures.

Short-Term Bond Funds: Average one-year return: 3.37%.

Bond funds that pool investor capital are an efficient way to buy bonds in small doses. They also offer investors a degree of diversification to minimize their risk of picking a bond from a deadbeat company.

The yields, however, are much juicier than those of money-market funds.

In fact, investors poured more than $160 billion into bond funds in 2011, according to Strategic Insight.

But the Net Asset Value or NAV of a bond fund does fluctuate with interest rates movements of the bonds held inside the fund.

Generally, short-term bond funds are less risky than long-term because they hold up better in a rising-interest rate environment. But even short-term funds with high-quality holdings can take principal losses if interest rates rise quickly.

And since they are not insured by the government, you can't be sure how much of your original investment will still be intact when you go to sell them. You also have to pay an ongoing expense to own the fund and you may also have to pay a commission or "load."

Short-term bond funds that get high marks from Morningstar Inc. (Nasdaq: MORN) include T. Rowe Price Short-Term Bond (MUTF: PRWBX) and Vanguard Short-Term Bond Index (MUTF: VBIXS).

The Bottom Line
Of course, all of these investment options for your cash come with risk. You'll lose out to inflation with CDs. Meanwhile, with bond and money-market funds there is the risk that you could lose at least part of your principal.

If you want to hedge your bets - and improve your flow of cash - until the market outlook improves, Gilani recommends adding a dash of high-yielding, big-cap stocks.

"As a very good defensive strategy, establish a core portfolio of five to seven very strong, liquid, cash-flowing companies," he said. "Avoid Europe, avoid commodities and avoid emerging markets for a couple of quarters to see where we are headed in terms of Europe and China."

But he also notes, cash will never be out of style.

"Nothing makes people bow so low as cash," said Gilani. "Cash will always be king - and the kingmaker."

Bonus Play: Here's another way to put your cash to work...

It's called the Geiger Index. And in 2011 it rewarded investors an average gain of 4.94% every 34 days. This year it's already provided investors with three triple-digit gainers-just 25 days into the New Year.

It's surprisingly safe too - 21 of 22 trades were winner last year

And you'll be surprised to learn exactly how this index works. Take a look. No wonder it's so safe.

Source http://moneymorning.com/2012/01/26/money-markets-cds-and-bonds-ups-and-downs-of-stashing-your-cash/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules