728x90 AdSpace

Latest News
July 22, 2018

Allocating to Cash


One of the Briefly Noted columns appearing in next month’s AAII Journal will give tips on what to do during each of the five years leading up to retirement. In the column, we reference AAII founder James Cloonan’s Level3 withdrawal rules. Among those rules is allocating an amount equivalent to two to four years of planned withdrawals in so-called safe investments, otherwise known as cash equivalents.

Allocating to cash—and equivalents such as certificates of deposit (CDs) and Treasury bills—won’t make you rich. It will also reduce your purchasing power—the ability to buy goods and services with the money you have—over time because of inflation. What cash does provide is a source of safety and liquidity. When an emergency occurs or things go haywire in the stock market, having access to cash can come in handy. This need for liquidity and safety should be balanced with the need for portfolio growth.

Cash can also help you handle more risk in your overall portfolio. Financially, it protects you from having to sell securities at depressed prices when the market is down. Psychologically, it can give you the confidence of knowing that, no matter what happens in the market, your shorter-term expenses are covered.

How much cash should you hold onto? It depends on your needs. Two useful rules of thumb are six months’ to one year’s worth of expenses for those who are working and four years’ worth of planned withdrawals for those nearing or in retirement. Amounts needed to cover other large expenditures within the next few years should also be maintained in cash. Beyond that, long-term investors should put the cash to work in assets with higher levels of potential return, such as stocks.

In terms of where to put your cash, you have options. Traditional checking accounts and brokerage sweep accounts often pay relatively little interest. (Depending on the size of your account, there may be perks and services that make enduring the low interest rates worthwhile.) Beyond what you need for spending or require quick access to, put the money elsewhere. Bankrate.com lists several online savings accounts paying yields of 1.70% or higher.  Three-year CDs with annual percentage yields of 2.55% are also currently available. When looking at bank savings accounts and CDs, confirm that they are FDIC insured. The standard insurance amount is $250,000 per depositor, per insured bank, for each account category.

Money market mutual funds from Fidelity, Schwab and Vanguard (and likely other companies) have yields currently ranging between 1.5% and 2.0%. These funds generally are insured by the Securities Investor Protection Corporation (SIPC) for up to $500,000. (SIPC insures actual cash balances only to $250,000.)

Treasury bills are another option. They can be purchased directly from the Treasury Department at TreasuryDirect.gov. The two-year note closed today with a yield of 2.59%.

The Week Ahead
The earnings floodgates are going to deluge the market next week with 182 members of the S&P 500 index scheduled to report. Included in this group are 11 Dow Jones industrial average components: 3M Co. (MMM), United Technologies Corp. (UTX) and Verizon Communications Inc. (VZ) on Tuesday; Boeing Co. (BA), Coca-Cola Co. (KO) and Visa Inc. (V) on Wednesday; Intel Corp. (INTC) and McDonald’s Corp. (MCD) on Thursday; and Chevron Corp. (CVX), Exxon Mobil Corp. (XOM) and Merck & Co. Inc. (MRK) on Friday.
The week’s first economic report will be June existing home sales, which will be released on Monday. Tuesday will feature the July Purchasing Managers’ Index (PMI) Composite Flash. June new home sales will be released on Wednesday. Thursday will feature June durable goods orders and June international trade. Friday will feature the first estimate of second-quarter gross domestic product (GDP) and the University of Michigan’s final July consumer sentiment survey.

The Treasury Department will auction $35 billion of two-year notes Tuesday, $18 billion of two-year floating rate notes and $36 billion of five-year notes Wednesday and $30 billion of seven-year notes Thursday.
Courtesy of Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here)   

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

© EconMatters.com All Rights Reserved | Facebook | Twitter | YouTube | Email Digest

  • Blogger Comments
  • Facebook Comments
Item Reviewed: Allocating to Cash Rating: 5 Reviewed By: Econ Matters