Cash vehicles remain trusted part of portfolio

investing

The question, advisers say, is when to move back into the stock market

November 09, 2008|By Andrew Leckey | Andrew Leckey,Chicago Tribune

The fear of losing money these days is very real.

Cash investments have been ready receptacles for billions of dollars that worried investors have pulled out of volatile stocks, bonds and mutual funds.

The liquid or relatively liquid obligations that provide a return in the form of interest payments include short-term certificates of deposit, money-market accounts, money-market funds, short-term bond funds and U.S. Treasuries.

The most popular cash choices of financial planners and market strategists are risk-free bank CDs and money-market accounts. They not only offer competitive yields, but the government also has increased the amount insured by the Federal Deposit Insurance Corp. to $250,000 per person per institution and $500,000 for joint accounts.

Cash vehicles have been the trusty portion of portfolios that hold a lot of stocks and bonds. They are used to store family emergency funds as well. Though rates of return are eroding from recent interest rate reductions, their role isn't ending any time soon.

"I would not buy Treasuries now, as I believe they're mispriced," said Adam Bold, chief investment officer of the Mutual Fund Store advisory and asset-management firm in Overland Park, Kan. "In the flight to safety that has occurred, extraordinary demand for Treasuries has impacted negatively on yield."

Higher yields than Treasuries are available on FDIC-insured bank money-market accounts offering the same guarantee as Treasuries, said Bold, who doesn't like tying money up in a CD because comparable yields are available with no strings attached.

For investors who have moved assets to cash, the question is when they will move back into the stock market, Bold said. He considers it a mistake to have all assets in cash, because "the market will rebound and, when it occurs, it will be dramatic."

"Institutional investors are stampeding into Treasuries, but their returns are low," said Greg McBride, senior financial analyst with Bankrate.com in North Palm Beach, Fla. "As an individual investor, you can have the same risk-free return but receive a higher yield."

Many investors are actively seeking the best returns.

"The most viable cash alternatives right now are short-term certificates of deposit, Treasuries and money-market funds," said Charles Zhang, certified financial planner with Zhang Financial in Portage, Mich. "If someone does not need to use their money in the short term, CDs are the most attractive option because they are FDIC-insured up to $250,000, offered at any bank and yield competitive interest rates."

Zhang expects low inflation and low interest rates over the next several years. Although many consider it less risky to liquidate their investments and hold cash when the market is troubled, Zhang said such a market represents the best time for a long-term investor to buy bargain-priced stocks.

"If you go for super-safe investments like passbook savings and Treasury money markets, they'll give you peace of mind but produce a low return that won't keep up with inflation," said Russel Kinnel, director of mutual fund research for Morningstar Inc. in Chicago. "It's a good time to have cash, primarily because you can put it to work, with stocks and bonds at fire-sale prices."

Just remember that with bond funds, you're stepping outside the realm of "risk-free" because the bond market has not been a place to hide lately, McBride said. That's not to say it is an inappropriate investment, but he believes it has to be viewed in the proper context.

Some said having a sizable chunk of your money in cash should be temporary at best.

"Historically, once the magnitude of a decline in a bear market gets down to 45 or 50 percent, the bear market generally is put to bed," said Steven Goldman, chief market strategist with Weeden & Co. in Greenwich, Conn. "Since we've been at those compelling levels, the only question is whether this backup is different than the ones we've seen before."

He's counting on the stock market to make a comeback.

"This is the time to start sharpening your pencil, asking if we're going to get out of the recession six, seven or eight months from now," said Goldman, who considers current stock prices extremely attractive. "By the end of next year, you'd think the economy will start to improve. And if so, you'll have had some nice dollar-cost averaging."

E-mail Andrew Leckey at yourmoney@tribune.com.

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