How safe is your cash?
Uttered to the exasperation of his TV commercial barber, fellow patrons, andmost of all the duck, Yogi inadvertently raises a crucial issue during financially turbulent times: the need for vigilant management of the cash in your portfolio.Beyond the bills stowed in your wallet, cash is the safest and most liquid asset class. It is an investment in an institution or instrument of the highest credit quality and that is immediately available.In a portfolio, cash compliments stocks, bonds, and alternative investments, and may be used to cover expenses and manage trades. Individuals may use cash as an emergency reserve or short-term savings. Businesses and non-profit organizations use cash to fund operating expenses.Bank on itA product of the Great Depressions catastrophic bank failures, Grandma kept her cash under the mattress. Today, banking your money is safer.In 1933s New Deal, Congress established the Federal Deposit Insurance Corporation (FDIC), providing limited government insurance for bank deposits. Originally set at $2,500, deposit insurance now covers up to $100,000 per individual account, $200,000 for joint accounts and $250,000 for IRAs. (See FDIC rules for accounts such as trusts.)Depositors desiring more insurance might use a Certificate of Deposit Account Registry Service (CDARS): your bank places your funds that exceed the FDIC limit in a network of outside banks up to the $100,000 limit tracking each deposit on your bank statement.Of course, many banks sell a variety of investment products that are not bank deposits and do not carry FDIC insurance. Visit http://www.fdic.gov to learn more about the program and product differences.Instruments of the Money MarketCash comprises a spectrum of instruments, with bank deposits being the safest and most liquid. The rest are directly owned bills or paper within the money market and vary in safety and liquidity.U.S. treasury bills direct obligations of the U.S. government with maturities up to 52 weeks top the list. T-bills can be purchased online, without commissions, directly from the government through TreasuryDirect, http://www.treasurydirect.gov. They can also be bought and sold through your broker.Next in line are short-term bonds issued and backed by government-sponsored enterprises. Some agency paper, such as from the Government National Mortgage Association (GNMA), is explicitly guaranteed. Other agencies, such as FNMA and FHLMCin the news lately for possible insolvency are quasi-government enterprises and carry only an implicit guarantee.For high-tax-bracket investors, AAA-rated short-term municipal bonds offer tax-free income.Lower on the safety/liquidity list are uninsured, highly rated bank certificates of deposit (CDs) and commercial paper short-term instruments issued by AAA-rated U.S. corporations. Yields tend to slightly increase the farther the instrument is from T-bills; however, the inherent risk in a lower rating may defeat the purpose of the cash instrument.Money Market Mutual FundsConstructing and maintaining an individual portfolio of money market securities is a big chore: enter money market mutual funds.Designed for various needs, some funds own only treasury or agency securities (e.g., Vanguard Treasury Money Market Fund, VMPXX; Vanguard Federal Money Market Fund, VMFXX). Others, like Vanguard Prime Money Market Fund (VMMXX), may own the panoply of money market instruments; the SEC requires such funds to maintain thorough diversification.Money market funds are designed to maintain a net asset value of $1.00 per share. Occasionally, overly aggressive, poorly managed funds will break the buck. Because of this risk, funds from highly regarded and well-capitalized companies are safest.Regardless of the company, always check the fund prospectus so that you know how your cash is held.Pay attentionWhen the economy is booming, we dont pay much attention to cash safety and liquidity. Use the current turmoil as a reminder to review your capital preservation strategies.If you are not convinced that one of these cash instruments is right for your portfolio and you resort to the mattress, at least diversify by using more than one mattress.Steven R. Smith, JD, CFP is the principal of RightPath Investments & Financial Planning, Inc. a fee-only Registered Investment Advisory firm in Frisco. If you have any questions or comments about the information provided in this article please contact Steve at (970) 668-5525 or email@example.com. (Specific investments or resources mentioned are illustrations only and are not recommendations. Past performance does not guarantee future results.)
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