Safe Places to Park Your Cash

​In my last post, I mentioned how brokerage firms are benefiting by paying you a very low interest rate on your idle cash.  In this post, I will give you some ideas on where you can safely earn much higher returns on your cash.  In some cases, 40x as much! (I had some accounts that were paying 0.05%.  Moving them to 2.0% is a 40x improvement!)

First, some background on Bonds. Bonds/Fixed Income/Debt Instruments all mean the same thing.  We are talking about debt which means you are loaning you money to someone and they are paying you interest in exchange.  There is a general feeling that Bonds are safe.  While they may be safer than Stocks, you can lose money on Bonds just like you can on Stocks.  Stocks and Bonds both have a capital appreciation component and a yield component.  With Stocks, you normally rely more on appreciation and with Bonds you are focused more on the yield.

When interest rates fall, bond prices go up.  If rates begin to climb, the price of a bond declines.  Many older people have a large percentage of their investments in Bonds thinking they are playing it safe.  However, if we see an increase in interest rates from these record low levels, Bond holders will end up losing money.  The longer term the Bond, the greater the price swing (a term called Convexity).  For example, a 30-year Treasury Bond with a 2% yield would fall 20% if yields were to go up to 3%.  I think this would be a major surprise to people thinking they were playing it very safe.

So how do you minimize this risk while still earning more than a fraction of a percent on your cash?

In today’s environment, I think the best thing to do is shorten your time horizon.  A short-term Bond will not have the large price moves seen with long term Bonds.  Most of the time, we have a normal sloping yield curve.  In other words, the longer the term, the higher the interest rate.  This makes sense.  If you loan money to someone and they agree to pay you back in one year with interest, you might be fine with a 5% interest rate.  However, if you are told “I can pay you in 20 years” you would want a higher rate to compensate you for the added risk of waiting that long to get your money and also the opportunity cost of not being able to use that money for other things.

Today, we do not have a normal sloping yield curve.  In fact, it’s practically flat and even inverted at times.  (Inversion is when short term rates are higher than long term rates) Therefore, you are not being adequately compensated for going longer term so I would recommend staying short term. 

In the Barron’s publication last weekend, they recommended some good ETFs (exchange traded funds) to consider:

JPMorgan Ultra-Short Income (Symbol: JPST) and Pimco Enhanced Short Maturity Active (Symbol: MINT) are large ETFs that yield about 2.5% and are primarily in Corporate Debt.

If you want even less risk, you could go with the iShares 1-3 Year Treasury Bond ETF. (Symbol: SHY) which yields 2.1%.  Government Securities are considered safer than Corporate securities because the Government can always print money to pay your interest, Corporations can’t.

If you want to go the ultra-safe option, you could buy Government Treasury Bills.  These have a maturity of less than one year.  Warren Buffett prefers these for his $120 billion cash hoard.  A good option is the iShares Short Treasury Bond ETF (Symbol: SHV) with a 2% yield.

If you want a nice mixture of Treasury and Corporate debt, you could go with iShares Core U.S. Aggregate Bond (Symbol: AGG) or Vanguard Total Bond Index (Symbol: BND) yielding about 2.7%.  These are very large ETFs, and both have rock-bottom expenses.  


Questions or comments, feel free to email me at [email protected]

  








Disclaimer: askfinanceguy.com is not an investment advisor, brokerage firm, or investment company.  This blog is for educational and/or entertainment purposes only. Use this information at your own risk. Do not consider anything on this page to be legal, tax, or investment advice.