Pick of the Week: Cash Is King

“When in doubt, stay out!”

Such is the market situation today. A couple of weeks ago we recommended our first short position. Today, we’re making our first recommendation to stay out of the market. We think cash is the best option for a portion of your portfolio. But not all ‘cash’ is equal. This market has forced us to identify an asset class. Let me explain.

Cash and Cash Equivalents

Without getting too philosophical, we define cash as physical money. In the United States, the portraits of Washington, Jefferson, Lincoln, Hamilton, Jackson, Grant, and Franklin printed on green and purple paper in your wallet is the only money we consider cash. Cash is physical paper and U.S. minted coins issued by the Federal Reserve.

However, ‘cash equivalent’ funds are just as stable as Federal Reserve notes. These are highly liquid securities. Examples of cash equivalents are U.S. Treasury Bills, checking accounts, and, until recently, money market accounts. Theoretically, these can be easily converted into cash of the green, folding variety.

When is a Dollar Worth 97 Cents?

But that’s just it. Yesterday, it was proven that financial theory does not always match fact. Reserve Primary Fund, the oldest money market fund in the country, fell below $1 per share by closing at $0.97. In economic parlance, Reserve Primary ‘broke the buck’. This is the worst thing a money market fund can do. But that’s not all. Depositors are scheduled to get 97% of their money back, but they must wait a week to make withdrawals. Indeed, we live in interesting times.

So with a $125 billion (as of June 30) money market fund going bust, the entire financial system has become anxious. Investors are looking for more liquidity. Now the average investor is forced to ask a important question: what is the best way to be in cash?

Different “Cash” Options

U.S. Treasuries are considered the safest investment in the world. Backed by the full faith and credit of the United States Government, they can be purchased through your brokerage account or directly at Treasury Direct without commission. Rates vary between different securities. Talk to your broker for more information about Treasuries. Keep in mind, short-term Treasury Bills have become so popular that they have almost no yield at this time.

Checking accounts, and usually savings accounts, are another safe option for depositors. If you deposit funds into an FDIC-insured account, then your money is protected up to $100,000 per bank. If you have more than $100,000 to protect, spread it out among several banks.

Money markets funds are another relatively safe option for investors. We keep some of our capital in a money market fund, but we also perform due diligence to keep our funds safe. The Treasury-only Money Market Fund is safer than a garden-variety money market fund. It only invests in short-term U.S. Treasuries. That said the yield typically will be lower than a regular money market fund.

Finally, there’s the standby ‘cash in the mattress’ option. Withdraw your thousands of dollars, preferably in large bills, and go hide it. Bury a safe chock full of greenbacks in your house’s foundation. You could also dig a hole in your backyard and hope that Fido isn’t looking for an old bone. If you want to get technical, this is the only cash option available. However, this option adds a new level of stress to your financial situation. It may not be the best choice since you’re taking on new risks like fire and theft.

Regardless, we recommend you hold a portion of your investments in cash or cash equivalents. One day the storm will pass. For now, we will live to invest another day.

All the best.