Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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


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 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.


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:

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 - 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