Cash investment yields have increased to levels not seen in decades as a result of the Fed’s continuous fight against inflation. The best place to keep your money will depend on your intended use.
In the wake of recent bank failures, many investors are questioning the safety of keeping their money in traditional bank accounts. While FDIC insurance provides a safety net for balances under $250,000, the recent events have highlighted the potential risks involved. This has led many to explore alternative options for their cash holdings.
This guide will delve into various safe havens for your cash, offering a comprehensive overview of where you can park your money with greater security and potentially higher returns than traditional savings accounts.
Understanding the Current Landscape
The recent collapse of Silicon Valley Bank and Signature Bank has shaken the confidence of many investors in the safety of bank deposits While the FDIC has proven to be an efficient operator in intervening in failing banks, the events have raised concerns about the limitations of FDIC insurance, especially in the face of rising inflation.
This has prompted investors to seek alternative options for their cash, seeking a balance between safety and potential returns.
Exploring Safe Havens for Your Cash
Let’s explore some of the most attractive alternatives to traditional bank accounts for your cash:
1. FDIC Sweep Programs:
Offered by brokerage firms these programs “sweep” client cash into FDIC-insured bank accounts. In some cases, deposits are spread across multiple banks to provide higher levels of FDIC protection. These programs often offer competitive yields, making them an attractive alternative to traditional savings accounts.
2. Money Market Mutual Funds (MMMFs):
These funds invest in U.S. Treasuries and other high-quality fixed income securities, aiming to maintain a share price of $1 while generating interest income. Unlike bank accounts, MMMFs are not FDIC-insured, but they generally offer competitive yields that fluctuate with market conditions. While share prices typically remain stable, there have been rare instances of “breaking the buck” and potential limitations on withdrawals during times of stress.
3. U.S. Treasuries:
Considered among the safest assets globally, U.S. Treasuries are bonds issued directly by the U.S. government. While their value can fluctuate while held to maturity, they offer a high degree of security and tax-exempt interest income on federal, state, and local levels.
4. Short-Term Bond Funds:
For investors willing to take slightly more risk, short-term bond funds offer increased yield potential while maintaining relative safety. These funds invest in fixed income securities with near-term maturities, minimizing the impact of interest rate changes on the fund’s price. Their yields generally track changes in interest rates, making them a step up in risk compared to MMMFs. Municipal bond versions of these funds can also offer tax-exempt interest.
5. Stocks:
While inherently riskier than other options, broadly diversified stocks, as measured by the S&P 500, have historically outperformed cash by a significant margin. Over the long term, the risk of loss tends to decrease, making stocks a potential consideration for a portion of your cash holdings.
Choosing the Right Option for You
The best option for your cash will depend on your individual circumstances, risk tolerance, and financial goals. Consider the following factors when making your decision:
- Investment Horizon: How long do you plan to keep your money invested? This will influence the types of investments that are appropriate for you.
- Risk Tolerance: How comfortable are you with potential losses? Your risk tolerance will guide you towards investments that align with your comfort level.
- Financial Goals: What are you hoping to achieve with your investment? Are you saving for retirement, a down payment on a house, or simply looking for a safe place to park your money?
- Liquidity Needs: How easily do you need to access your funds? This will determine whether you should choose more liquid or less liquid investments.
Frequently Asked Questions (FAQs)
Q: How can I balance my cash holdings with other investments?
A: Consider allocating a portion of your cash to low-risk investments like bonds or dividend-paying stocks. However, don’t neglect higher-risk growth investments like equities. A balanced portfolio can help mitigate risk while still providing the potential for long-term growth.
Q: What factors should I consider when choosing a place to put my cash?
A: Consider the holding period, your risk tolerance, and potential opportunity costs. Choose options that align with your time horizon and comfort level with risk. Remember, lower-risk options typically offer lower returns than higher-risk options.
Q: How much return can I expect from alternative cash placements?
A: Returns from alternative cash placements can vary depending on the option you choose. FDIC sweep programs and money market funds typically offer modest returns, while short-term bond funds and stocks can offer higher potential returns with increased risk.
Q: How do alternative cash placements compare to traditional bank accounts?
A: Alternative cash placements often offer higher potential returns than traditional bank accounts, but they may also involve varying degrees of risk. FDIC sweep programs and money market funds offer a high degree of safety, while short-term bond funds and stocks carry more risk.
In today’s evolving financial landscape, exploring alternative options for your cash can provide greater security and potentially higher returns than traditional bank accounts. By carefully considering your individual circumstances, risk tolerance, and financial goals, you can choose the options that best suit your needs and help you achieve your financial objectives.
Remember, there’s no one-size-fits-all approach to managing your cash. The best options for you will depend on your unique circumstances and financial goals. By conducting thorough research, seeking professional guidance if needed, and making informed decisions, you can navigate the investment landscape with confidence and achieve long-term financial success.
Should you have cash in your investment portfolio?
According to Schwab, cash can play a significant role in a diversified investment portfolio, assisting in lowering portfolio risk, offering stability, and producing yield on the funds required for particular objectives like setting up an emergency fund or making a down payment on a home.
For savings and investment funds, there are a few choices to take into account:
- You can use money that you have put aside for an emergency or that you intend to transfer to a checking account soon in a yield-bearing savings account. While you won’t likely get the best yield with this kind of account, you can access your money right away, though there might be monthly withdrawal restrictions. The FDIC insures savings accounts against money loss up to $250,000 per depositor, per FDIC-insured bank, depending on the type of account ownership.
- One kind of mutual fund meant to keep your capital steady and liquid is the money market fund. Such funds invest primarily in high-quality, short-term debt securities. You should think about include money market funds in your portfolio if you can wait a day to access your cash, as they have the potential to yield higher returns than savings accounts. These funds aim to protect the value of your investment even though yields vary. Before you invest, make sure you understand the credit risks that money market funds take on and how they are mitigated. Not all money market funds take on the same level of risk. The Securities Investor Protection Corporation (SIPC) protects money market funds from brokerage failure by classifying them as securities.
- A bank will offer you a fixed rate of return on a Certificate of Deposit (CD) if you lock away your money for a predetermined amount of time (referred to as the “maturity date”), usually between three months and five years. If you know you won’t need the money right away or have a long time horizon, CDs might be a good option. The yield on a CD usually increases with the length of time you invest it and is generally (though not always) higher than yields on individual U S. Treasury bonds or money market funds. But, you might have to pay an early withdrawal penalty and get less money back at maturity if you need to take out the money earlier than anticipated. The FDIC insures CDs against money loss for each depositor up to a maximum of $250,000 per FDIC-insured bank.