Cash is an asset class that may be overlooked. However, we believe it plays a key role in the overall diversification of a portfolio. Now that the U.S. is moving out of a 0% interest rate environment, investors may earn meaningful interest on their cash positions.
There are a Few Options to Consider for Cash Investments
- Interest-bearing savings account can be used for cash that has been set aside for an emergency fund. Savings accounts may not offer the highest yield available, but the cash is liquid and easy to access. If the savings account is with an FDIC-insured bank, up to $250,000 per depositor is insured against loss.
- A purchased money fund is another common vehicle for cash investments. These are mutual funds that invest primarily in high-quality, short-term debt securities, such as U.S. Treasuries, CDs, and commercial paper. Due to the underlying investments, purchased money funds may offer a higher yield than savings accounts. Purchased money funds are not FDIC insured and it may take a day to access the cash since these funds are bought and sold on the open market.
- Certificates of Deposit (CDs) are savings accounts offered by banks that offer investors a fixed rate of return in exchange for locking the funds in the CD for a set period, generally between three months and five years. Because funds are invested until their maturity date, the yield on CDs is generally higher than those of savings accounts. CDs from FDIC-insured banks are also insured against loss. An early withdrawal penalty may apply if an investor withdraws funds prior to the CD’s maturity.
- S. Treasuries are fixed income (bond) instruments and are not the same as investing in the three cash and cash equivalent vehicles mentioned above. However, Treasuries do offer some of the same benefits. Treasuries can have varying maturities and an investor’s yield is guaranteed for that period. Treasuries are not FDIC insured, but they are backed by the U.S. government.
We think cash is an important asset class to have in any investment portfolio and the utilization of that cash should be managed according to an individual investor’s risk tolerance and portfolio objectives. At Schultz Financial Group, we consider an investor’s cash needs, risk tolerance, liquidity, and portfolio objectives in order to help proactively manage a client’s cash position.