With interest rates on the rise and the stock market in the dumps, it’s no surprise that cash is back as a viable investment.
For years, cash was a loser’s game. You made next to nothing on your deposits, and inflation and taxes would eat away at whatever you did manage to squirrel away.
“A person who invested $100 in the S&P 500 ten years ago would have about $396 by now, compared with roughly $104.50 on the same investment in cash,” writes Riva Gold of the Wall Street Journal. And of course, once inflation and taxes were factored in, holding cash usually resulted in negative returns.
How things have changed. Welcome to the new era, where cash is king.
Cash may actually manage to outperform stocks and bonds this year, which would mark the first time that has happened since 1992, according to the Wall Street Journal’s Gold.
There are now several decent cash options that we are using for clients. Of course, however you slice it, the big appeal of cash now is that it pays a modest return and promises to hold its value, immune from market turbulence.
Select money market deposits are now paying in excess of 2% annually, and boast standard FDIC protections. That’s still way under the 8% yields we captured years ago (remember those?), but it seems like a king’s ransom after the zero-interest rate era. Another plus? Money market rates will continue to float upwards as the Fed raises rates, and your funds are available 24/7 if you need to make a withdrawal.
Another good option is short-term CDs (we like one-year and similar maturities). These are currently paying in the 2.7% neighborhood, and we consider them a good parking place for cash you may need in about a year. We buy brokered CDs to access offerings from several banks all in one consolidated account. CDs like this can normally be liquidated at any time; if you’re buying CDs on your own just be aware of any potential early-withdrawal penalties.
Short-term or floating rate bonds are another lower-risk option for investors looking to take a break from the market roller coaster. One advantage? Short-term bonds may throw off more income than money markets or CDs. However, since they are bonds (not cash), you will get more price variation than with money markets or CDs. Still, short-term bonds are normally only a year or so from maturity, so they’ll have less risk than longer-term bonds.
One important reminder
While money markets and other short-term investments are good places to hide out for the short-term (no surprise there!), they aren’t good choices for the long haul.
As tempting as it sounds to avoid risk, they just won’t give you the return you need for the 30 or 40-year period you’ll spend in retirement (let alone the 40 or more years you’ll spend working until retirement).
So if you do lean toward these lower-risk options in your portfolio, understand they are meant to provide short-term liquidity and peace of mind, and really shouldn’t substitute for longer-term growth investments like stocks.