What to do with your cash

[modhatter]

I have been sitting on a sizable amount of cash for sometime, hoping things would change in the CD interest department. They have. For the worse.......
Now the other half of my what seemed like miserable 3 1/2 % interest rate CD's are coming due soon, leaving me with about $700,000+ in cash. I think the stock market is pretty much at the top of it's game right now, and besides I have my other 50% in stocks. Bonds at this point are not the best avenue to go either. So where do you go? Best yields out there are only about 1% even longer term. What a miserable time to need cash flow. Will it ever end?

 

[rescueme]

Hookers & booze works for me ...

Seriously, I don't look at the "all or nothing" answer. CD rates are down. Market may/may not be at a temporary high (it's still not surpassed its historical peak).

My answer? Put a little there, put a little there. While I might not reap the "best", I don't incur the "worst".

And if you are really worried? As for me, I hold Wellesley (yea, I'm with another on this forum...) It's a good place (IMHO) to park your cash while you consider the options available to you. Nothing has to be done immediately, does it?

 

[Midpack]

A recent similar thread, but there are no obvious answers as far as I can tell. Right now it's the lesser of all non-equity evils. http://www.early-retirement.org/forums/f28/money-market-alternatives-53734.html

 

[photoguy]

Maybe spread your bets across multiple investment vehicles including bonds and stocks?

 

[W2R]

I wish I had an easy answer to your question! I'd like to do something with the large amount of cash that I have been keeping in money market for our move north (which isn't going to happen after all) and to buy a house up there (which isn't going to happen either).

You could look for the best rates you can find in CD's and high interest online savings accounts, and put the money there. It isn't going to be much, though, I agree.

There isn't any wise advice to be given here, IMO, or if there is I haven't figured it out. I am not sure that 1% is worth jumping through hoops over. I will probably leave 2/3 of my money market cash where it is (might be useful for rebalancing), and put 1/3 into total bond market index despite predictions. Then if total bond market index drops precipitously as predicted, I would buy more at that time.

Sometimes it almost seems like we should go on a wild spending spree to get value from our cash, these days. Not that I would actually DO that. I already have a brand new SUV. I did look at more expensive houses but decided that for me, the headache of leaving a $300K house behind during a hurricane evacuation would be even worse than the headache of leaving a $160K house behind. Besides, I like my present house and haven't yet seen another house on the market that I like better.

 

[bikeknit]

This is a difficult situation. We can only hope that it is temporary.

I'd ask, why do you have so much in cash? For the FDIC insurance? Then I'd look into laddering CDs so you can take advantage of any upward changes in interest rates with at least some of the money. If you feel you can let go of some of the insurance aspect, short-term bond funds have some (but not all) of the safety with a little better return.

Just remember, I have no particular expertise, just another person trying to find the best options in a crazy world.

 

[LOL!]

The answer is clearly to accept risk and invest your money in bond funds. If you are afraid of losing money, then why do you have any equities at all? It just doesn't make sense that you are skittish about losing maybe 5% in a bond fund when you can lose 50% in your equity funds.

As I wrote in the thread linked by Midpack, I like to use short-term corporate bond funds. You can chart them and see that they can lose money, but they also recover readily. For more comfort, simply chart them versus your equity funds. If you don't like the risk of corporate bond funds, then you have short-term Treasuries. Don't like those, then you have cash (CDs, money markets). Don't like cash, then you are running in circles.

 

[frank]

I also have a lot of cash in cd's though not coming in for another year. I wonder what to do when it finishes up. I have been looking around and see some at 3% for 60 mos. but thats nothing to write home about. I was watching some of the investment people on this site to get an idea about how investing on an online broker works out. that might be worth a try if you have the stomach for it. I hope you figure something out as there are a lot of us wondering.

 

[Midpack]

The answer is clearly to accept risk and invest your money in bond funds. If you are afraid of losing money, then why do you have any equities at all? It just doesn't make sense that you are skittish about losing maybe 5% in a bond fund when you can lose 50% in your equity funds.

Good post. And while the above is very true in general, at the moment in practical terms interest rates can only go up from here, so bonds have almost no upside at the moment. Only a question of when. So unless I'm missing it (entirely possible), cash paying a millionth of a percent might actually be a better investment at the moment. Never thought I'd see cash doing this poorly...

 

[W2R]

OK, in the interest of "putting my money where my mouth is", and also due to the fact that procrastination isn't helping, I just put 39% of my money market cash into VBTLX. (39% was a nice even number, and 1/3 was not).

I really don't see any short term need for this money whatsoever, now that we are not planning to move. Although I did not read his post until afterwards, "LOL!" is right in his comments about risk. I am fully capable of taking some risk with it, and now I have done so. If/when the share price drops, well, too bad and I will have to just console myself with the dividends. Also I can buy more VBTLX at the lower price.

 

[nwsteve]

In similar situation with more cash than desired. I have been following the "some here, some there" approach mentioned earlier. For example, after resisting setting up another relationship, I bit the bullet and put some cash in the Costco Capital One MM, getting about 1.5% plus a sign up bonus of $50 if you are an Executive Mbr. Rest has gone across select ST, investment grade bond funds through my Fidelity account. If you have Fido you can do mutual fund search with filters for 4/5 star bond funds and come up with some decent choices and still keep your expense ratio down.
Good Hunting
Nwsteve

 

[frank]

I thought people got into bond funds because they are a safe place to park your money. If there is a chance of loosing 5% why go there for a 3.25 income?

 

[brewer12345]

I thought people got into bond funds because they are a safe place to park your money. If there is a chance of loosing 5% why go there for a 3.25 income?

Presumably because:

1) they are asset allocators and choose not to speculate on the immediate future

2) they believe the odds of a 5% or better loss are very low, while the income is certain

3) they are idiots, or

4) they believe that bonds will appreciate

 

[W2R]

Presumably because:

1) they are asset allocators and choose not to speculate on the immediate future

2) they believe the odds of a 5% or better loss are very low, while the income is certain

3) they are idiots, or

4) they believe that bonds will appreciate

I'm sure #3 applies in my case! But I tell myself #1 is behind it.

 

[Midpack]

Presumably because:

1) they are asset allocators and choose not to speculate on the immediate future

2) they believe the odds of a 5% or better loss are very low, while the income is certain

3) they are idiots, or

4) they believe that bonds will appreciate

I used to be 100% brilliant long ago, now I am 26% idiot...and will undoubtedly become more of an idiot in the decades ahead

 

[LOL!]

What's funny is that while all the bond-phobes were waiting for rising interest rates to cause tanking bonds, the bond funds themselves went up about 5% in the last 12 months while money market funds returned 0.1% (see e.g. https://personal.vanguard.com/us/funds/tools/benchmarkreturns ). Bond funds are up about 0.8% in the first 2 months of 2011.

The takehome message I get from that is that if you just stay in bonds, you will eventually come out ahead even in the short-term. Or maybe this question will help: What is the worst 12-month return for a short-term corporate bond index fund?

 

[Tiger]

44% of my portfolio is in VG Wellesely Adm (VWIAX). My emergency money and cash for investing are in VG Short Term Investment Grade Adm (VFSUX), CD ladders and a savings account that pays 3%. My regular checking account with Capital One pays 1.15%.

 

[2good]

I am also looking for ways to get some decent returns for the cash I am sitting on. I will probably follow the advice in a recent Money Magazine article (Profit from the Muni Mess, Munis: The new power portfolio - Feb. 12, 2008). Any feedback regarding buying Muni's at this time is welcome.

 

[deserat]

In the same position, substantial 3 year cd coming due and all of the less risky vehicles have crap for gain......sigh. I might need the money in the next year, so don't want to lock it up for too long.

 

[freebird5825]

Presumably because:

1) they are asset allocators and choose not to speculate on the immediate future

2) they believe the odds of a 5% or better loss are very low, while the income is certain

3) they are idiots, or

4) they believe that bonds will appreciate

I'll take door #1 and door #2, please.
Door #3 seems to be too crowded.

I just placed the online order at VG to add a nice little stash of VWITX to my portfolio and slushed a tiny bit more into my existing VWALX holding. VMLTX continues to build via DCA.
My TE bond fund diversification (with respect to duration) is now pretty evenly spread. I will enjoy having that sweet TE dividend income ready for the tapping as needed. I have implemented a near term solution to produce extra income as needed to offset recurring zero COLAs and increased COL (gas prices, property taxes, food costs). Mission accomplished.
I left 1/3 of the 13% cash in the same TE money market fund. No reason to use that right now. A rainy day fund...

 

[LOL!]

Bond funds usually don't drop too much (if they are not long-term duration). One can see that bond funds went up nicely last year until early November. Then when China et al started raising interest rates and when some municipalities threatened default, they dropped in value by about 5% from the highs.

They are already up about 2% off the lows.

So with losses of 5% and gains of 2%, maybe a lot of folks have missed a buying opportunity? Of course, while bonds were doing this, stocks went up 15%, so maybe you didn't notice or didn't care?

 

[braumeister]

I'm just crazy enough to believe that good solid stocks that pay good dividends are a safe place for money.
A few examples:
Eli Lilly pays 5.7%
Verizon pays 5.4%
Unilever pays 3.9%
Heinz pays 3.7%
McDonalds pays 3.3%

Those are just a few in my personal portfolio, most are up over the last year, and you can't say they are not all solid, reliable companies. I don't expect any of them to tank in the foreseeable future, and there is always the chance of nice gains in stock price over time.

As long as you have a good percentage of fixed income (I'm around 35%), I am happy with good stocks. I won't buy any stock that doesn't have a decent dividend yield, but there really are a lot of good choices out there.

 

[DblDoc]

I'm just crazy enough to believe that good solid stocks that pay good dividends are a safe place for money.

Until they are not...

You takes your risk wherever you feel comfortable. For me this is not an approach with which I would sleep well at night. TANSTAFL.

Like W2R I have been aggressively purchasing bond funds, in my case to try and keep up with my rising stock allocation. Sure the NAV may go down at some point when rates rise in the near term but I have no intention of selling them then. These are purchases that I will hold for decades at which point the blip in the NAV will be long forgotten and lost in the yields from dividends.

DD

 

[haha]

What's funny is that while all the bond-phobes were waiting for rising interest rates to cause tanking bonds, the bond funds themselves went up about 5% in the last 12 months while money market funds returned 0.1% (see e.g. https://personal.vanguard.com/us/funds/tools/benchmarkreturns ). Bond funds are up about 0.8% in the first 2 months of 2011.

The takehome message I get from that is that if you just stay in bonds, you will eventually come out ahead even in the short-term. Or maybe this question will help: What is the worst 12-month return for a short-term corporate bond index fund?

I hope these gains are guaranteed in the prospectus!

Ha

 

[freebird5825]

Until they are not...

You takes your risk wherever you feel comfortable. For me this is not an approach with which I would sleep well at night. TANSTAFL.

Like W2R I have been aggressively purchasing bond funds, in my case to try and keep up with my rising stock allocation. Sure the NAV may go down at some point when rates rise in the near term but I have no intention of selling them then. These are purchases that I will hold for decades at which point the blip in the NAV will be long forgotten and lost in the yields from dividends.

DD

Count me in on occupying one of the more comfortable deck chairs on this long term voyage.