It’s Time to Refocus on Cash Investing

If you have been sitting on cash since the pandemic sent short-term yields plummeting to near zero, refocusing on cash investments now could earn you thousands of dollars in the coming year.

Let’s say you usually try to keep $50,000 in your money market account as an emergency fund. However, because you’ve got some projects planned and there’s really been no other attractive places to park your cash in recent years, you’ve let that account balloon up to $100,000. If you leave those funds in the money market account over the next year, based on current rates, you are likely to earn very little. On the other hand, if you move just half of those funds — $50,000 — into one or more of the conservative, short-term instruments whose yields have recently soared, you could potentially pocket an additional $1,500 to $2,000, if not more.

Not a bad return on a short phone call with your financial advisor.

Options paying more

Melissa Greenwood, a senior financial advisor with UnionBanc Investment Services,  says investors with large cash balances may want to consider a number of low-risk vehicles that are now offering annual yields of up to 3% or more. Some options include:

Certificates of deposit. As recently as March 16, 2022, the average 1-year yield on a CD was a meager 0.19% APY, according to Bankrate.  However, between March and September, the Federal Reserve raised its target federal funds rate five times by a combined 3.00%, and CD rates have taken off. In September 2022, working with a financial advisor, you could have secured a 1-year brokered CD paying in the 3% range.

CDs purchased from an FDIC-insured bank are protected up to $250,000 per depositor, providing the safety that many investors are seeking.

Greenwood recommends “laddering” CDs in a volatile rate environment. For instance, if you want to invest $200,000 and stay safe and relatively liquid, it can make sense to open a series of CDs of varying maturities, each less than one year, at one time. For instance, you could open four $50,000 CDs with 3-, 6-, 9- and 12-month maturities. If rates continue to rise, this strategy can allow you to reinvest funds at a higher rate once the CD matures. You also maintain liquidity because you get access to $50,000 of your money every three months.

Treasury bills. T-bills are short-term U.S. government debt obligations backed by the Treasury Department with a maturity of one year or less. They are not FDIC insured. However, they are backed by the full faith and credit of the federal government. What’s more, whereas FDIC insurance coverage is limited to $250,000 per depositor, the government is obligated to repay any size T-bill.

T-bills have been paying in the same range as CDs. In addition, T-bills are exempt from state income tax, which is particularly attractive if you live in California where state taxes are comparatively high.

Commercial paper (CP). This is short-term, unsecured debt issued by a company. Generally, CP pays a fixed rate of interest often greater than what you can earn on CDs and T-bills. However, such debt isn’t insured or backed by the federal government. You must rely on the financial strength of the issuing company to safeguard your investment. Still, investing in CP issued by reputable, well-established companies could be considered relatively safe.

Corporate short-term bonds. These are unsecured corporate obligations with maturities ranging from 1 to 3 years. They typically pay a little bit more than the options above. For instance, these bonds often pay about 100 basis points more than a high-yielding CD.

Fixed annuities. If you have funds you can invest longer in order to earn even higher yields, you might want to consider these instruments that are sold and backed by life insurance companies. Fixed annuities pay a guaranteed rate for 3 to 7 years and grow tax deferred.
 

Taking on inflation

Even though many of these short-term investment options are paying rates much higher than just a few months ago, they still won’t allow you to keep pace with the recent 40-year-high rate of inflation, Greenwood points out. “If you have a longer time horizon,” she advises, “you should be looking at other investment options that will help you keep up better.”

Most such options would be equity investments. However, there is one safer, government-backed debt obligation that offers inflation protection: Series I savings bonds. Interest payments on I bonds are determined by the combination of a fixed rate of return and a variable rate based on inflation that is determined by the Consumer Price Index and is set twice a year. The blended rate for I bonds purchased until Oct. 31, 2022, is 9.62%.

There are a few caveats, however. I bonds are limited to $10,000 per investor per year for electronic bonds, and $5,000 per investor for paper bonds, the latter of which are only available as part of your tax refund. Also, to purchase electronic I bonds, you have to do it yourself by setting up an account at www.treasurydirect.gov rather than working through a financial advisor or broker. Finally, you can’t cash in your I bond for at least a year, and if you cash it in before 5 years, there is a 3-month interest penalty.
 

When opportunity knocks

Cash investments are paying real money again. Greenwood suggests investors meet with their financial advisor to discuss what could be a fleeting opportunity to take advantage of yields on short-term investments that are much improved.

An advisor can walk you through an array of cash investment alternatives, highlight their risks and rewards, and help you determine if any of the higher-yielding options make sense for your situation.

Don’t wait, Greenwood recommends. “Who knows when these rates are going to go back down.”
 

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