How to Get the Best Return on your Cash Holdings
Experienced investors know the importance cash plays in a diversified portfolio.
In times of economic stability or growth when interest rates are high, the allure of cash is obvious. Put your money in a high-yielding savings or money market account and watch it grow at rates of 5%, 6%, or 7%.
But in low-interest markets, like the one we are currently experiencing, you may be wondering why you should keep cash on hand when it could be making you more money in other securities.
First, let’s look at why having cash savings as part of your investment strategy is important; then we’ll cover the best places to put your cash in a low-interest market.
Cash does several things for your portfolio:
• Reduces volatility – While securities like stocks, bonds, etc. fluctuate wildly based on market conditions, cash stays relatively stable. Of course, rising inflation and depreciation of dollar value occur, but these are slow processes and have less effect on your cash holdings than the volatile market.
• Provides liquidity – Having cash on hand available for quick investment in a sudden opportunity is a huge boon. If you have to wait to liquidate one asset before you can invest in another, you could miss out on a valuable opportunity.
• Protects against emergencies – Emergency funds just make good sense. Life happens. You need to have liquid assets, i.e. cash, available for immediate use when unforeseen events take place. Whether it’s the loss of a job, an injury or illness, or an accident – the only way to prepare for the unexpected is to have cash ready for whatever needs arise when things go badly. If not, you’ll end up pulling cash out of investments to cover your needs, and you risk losing way more than you would have gained by having that cash tied up in other types of investments.
Hopefully, you can see the importance of keeping cash as part of your portfolio. But where should you put it to get the best possible return?
In high-interest markets, you don’t have to look far to find a high-yielding savings or money market account. But that isn’t today’s market.
According to mybanktracker.com, the average APY (annual percentage yield) or interest rate as of today is 0.32%. With many well-known traditional banks coming it at around 0.01%.
It’s hard to fault investors who prefer to put their money in higher risk securities than accept these minimal returns. But if you’re willing to do a little work, it is possible to find higher returns.
You need to keep the cash available for the reasons listed above, but there is no reason you shouldn’t get the best possible interest rate, so the money is doing something for you as it sits there.
Online savings accounts or accounts offered through brokerage firms are currently yielding much higher interest rates than accounts in traditional brick-and-mortar banks.
Below is a list of the best rates available as of today and where you can find them:
• Goldman Sachs – 1.60%
• American Express – 1.55%
• Synchrony Bank – 1.55%
• Capital One 360 – 1.50%
I know these rates look shabby compared to the rates of the past, but compared to today’s average of 0.32% these are pretty high returns. The rates will go up eventually. The idea is to get the best you can now.
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