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Park Your Cash in a Safe Neighborhood
Joe Mont
02/25/11 - 08:30 AM EST
BOSTON (TheStreet) --They say "cash is king," but it may take a while for it to reclaim the throne.
Conventional wisdom has usually divided savings into buckets. There is a portion of your assets -- including 401(k)s and IRAs -that is invested to reap returns. The opposite end of the spectrum prizes security for your nest egg.
Choosing the best way to park your cash comes
down to how available you want your money at
all times, how important returns are and how
much risk you can stomach.
With "longevity risk," the prospect of running out of money during a lifetime -- a top concern for many near or in retirement -the question being asked more and more is actually a chicken-or-egg type riddle: Which is more important, growing capital or
protecting it? With the Fed still intent on keeping interest rates low, even as inflation creeps back onto the landscape, finding
places to park your cash that offer both peace of mind and reasonable value is no easy task.
Choosing which instrument is best for your needs comes down to how available you want your money at all times, how
important returns are and how much risk you can stomach.
Mike McGervey, president and founder of McGervey Wealth Management in North Canton, Ohio, describes a typical cash
and cash-equivalency strategy as "protective mode."
"Typically cash in a money market earns next to nothing," he says. "Sometimes I will have a client ask, 'What's our cash going
to earn when it is on the sidelines?' and I'll stop and tell them they are missing the point. If we are preventing a 30% decline in
your portfolio then maybe, in effect, your cash has earned you 30% because it kept you out of the fire."
"There are things we need to talk to a client about before we run off and park money in a certain place," says Chris Abts,
founder and president of Cornerstone Retirement Group in Reno, Nev. "When you are dealing with retirees or somebody
getting close to retirement, one of the first things we want to do is address how much liquidity they need now and in the
future. We find some people try to have too much liquidity, and that harms earnings, while other people don't have enough
liquidity."
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3/1/2011
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"If we suspect that cash is going to be on the sidelines for some time, we might look at a capital preservation fund of some sort
that might pay a 3% yield and be invested in very short-term government securities," McGervey says.
Determining fixed expenses and considering post-retirement income sources in light of inflation and taxes can provide
perspective on how much income they will need from their investments and how much risk they are willing to take for investing
money for discretionary funds.
"Then we know how much money should be in safe money categories," Abts says. "Safe money is not something you park and
two years later go and buy a vacation home. Safe money is ideally what you are going to use for income in retirement ... We
are going to look for something where we can't lose it and also get a good solid rate of return."
There are pros and cons to the various "cash" strategies depending on an investor's needs and desired outcomes. For those
comparing returns, TheStreet's Banking My Way offers comparison tools and national averages to help compare rates for
certificates of deposit, money market accounts and checking and savings accounts.
Bank accounts
For many, checking accounts should really be considered more of a service than a savings plan. Interest paid, such as it is, can
be quickly eaten up by the increasing encroachment of multiple fees. As for traditional savings accounts, FDIC backing means
your money is safe, even in a worst-case scenario such as a bank failure. The meager interest accrued, however, can barely
keep pace with inflation.
Online bank accounts
As an alternative, high-yield bank accounts, many offered by online-only banks, offer better rates without sacrificing liquidity.
They can do so because their purveyors have ratcheted up the competition with bricks-and-mortar branches and, lacking real
estate overhead (and we assume all those chained pens would also add up) they can afford to be a tad more generous.
Treasury and securities
The federal government also has a horse in the race. Treasury bills (with short-term maturity) and Treasury notes (with a
longer commitment) are sold online by the government at TreasuryDirect.gov, as well as at most banks.
Given that inflation may be staging a comeback, despite the Fed's efforts, Treasury Inflation Protected Securities -- commonly
called TIPS -- could make sense, as would the similar, private-sector issuance of Corporate Inflation Protected Securities.
Structured products
Money market accounts are another safe, FDIC-insured alternative, but often have restrictions on withdrawals and minimum
balance. They differ from money market funds, often offered by brokerages, which invest in government securities, commercial
paper (i.e. debt) and bank-issued CDs. While returns may be higher, they are pure investment plays and, just as is the case
with a mutual fund, offer no FDIC safety net. Though touted as safe, there is risk, as was illustrated recently when there was a
wave of funds "breaking the buck" and falling below a per-share value of $1.
Structured products, such as CDs and money market accounts, are potentially good because they usually offer higher returns
compared with other vehicles of their ilk.
"The downside to them is that they are not liquid investments," McGervey says. "If you make a commitment to a structured
note you are usually doing so for 18 months, two years, three years or even longer than that.."
Bonds
More risky, given fears of cities and states going into default, are municipal bonds. They do offer tax advantages that can add
value to their returns. An alternative was the federally subsidized Build America Bonds program, but it has already been
defunded into oblivion by Congress.
Corporate bonds are a private-sector varietal, but they carry more risk. In fact, the returns are usually proportionate to the
company's credit rating (the worse it is, the better the payoff).
-- Written by Joe Mont in Boston.
>To contact the writer of this article, click here: Joe Mont.
>To follow the writer on Twitter, go to http://twitter.com/josephmont.
>To submit a news tip, send an email to: [email protected].
RELATED STORIES:
>>Retirement Goals to Act On Before Recovery
>>The Good, Bad and Ugly of Inflation for Seniors
>>Portfolio Moves to Make Before the Recovery
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3/1/2011
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