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.
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.
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.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.