If I’m Holding Cash, Where Should It Be?

November 14, 2018 - John Osbon (2 mins to read)

If I’m Holding Cash, Where Should It Be?

Intense market volatility over the last few months has been a good reminder that money needed in the next 3 to 24 months should not be in stocks. It should be in a safe, interest-generating investment. The first option that comes to mind is usually bank CDs with FDIC insurance. CDs, like many heavily marketed investment products, are often not the optimal choice. Here is what we are doing with cash today.

Looking everywhere

Investing cash is a balancing act featuring yield, safety, and flexibility. Last year, when the Fed was still raising interest rates tentatively, CDs won out. But now that the Fed is consistently raising short term rates, the US Treasury market is more attractive. The after-tax yield confirms the case for US Treasury bills.

The US Treasury market for individuals

The Treasury market for individuals has three primary advantages

  • Backed by the US government, treasuries are the ultimate government promise to repay. (For CDs, a bank crisis will freeze the return of client money until FDIC insurance pays out.)
  • You get the same rate as large institutions.
  • You can sell anytime before maturity without penalty. It’s a highly liquid market with tight spreads, so you’ll get a fair price, and you keep the accrued interest (unlike CDs).

One more advantage: Taxes

The fourth reason to own T-bills has to do with taxes. Individuals pay no state or local taxes on T-bill interest. You do pay those state taxes on a CD. With a flat MA state rate of 5.1%, a CD’s 2.4% yield becomes 2.28% after taxes.

How it works

An individual can buy up to $1M of 3, 6 or 12 month bills every week at auction. For those needing a cash reserve, I would encourage a 3-6-9-12 month T-Bill ladder supplemented by a high yield Fidelity money market fund. The ladder evens out returns and increases liquidity.

The execution of this strategy takes a fair amount of time and attention for an individual but is easily done by us. As an RIA (registered investment advisor) we can buy anything for clients. We don’t get paid by issuers so there are no sales-based conflicts of interest to worry about.

Wrapping Up

Are T-Bills always the answer? Definitely not. Strategies change as the market changes. We are always watching CD issuers and the Fed to determine our preferred cash path. We also help clients answer the other key question: How much cash should I be holding? Let us know if you would like to see the details.



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