Best money investment

Cash Investments

Most investors will tell you that there are three basic types of investments:  stocks, bonds, and cash.  Some individuals treat cash as something you only need to have on hand for those unexpected expenses.  But as we shall see, cash can, and should, play an important role in nearly everyone's mix of portfolio assets.

Cash Assets
There is no doubt that having cash around as "spending money" is a necessity for many of us.  We need cash to pay our monthly bills, and we might also like the idea of having some extra money handy in case an unexpected expense arises.  Those are two pretty compelling reasons to have, and hold, cash.

Asset Allocation
There are other reasons to hold onto cash, even beyond those "rainy day" expenses.  In fact, asset allocation theory tells us there are several factors that drive our need to hold cash, for example:

• Years Until Retirement - this factor should read more like: years until the money is needed.  The point here is the closer you are in time to needing money, the more liquid the investment.

• Risk Tolerance - if you're the type of person that panics when their investments are performing poorly, then you're a good candidate for investing in cash.

• Knowledge and Comfort with Alternative Investments - unfortunately for some of us, we are limited in our investment choices due to a lack of knowledge.  We simply don't know how to invest our money elsewhere, so we hold cash.  In this example, probably in-excess.

Advantages of Cash Investing
The primary advantage of cash is the preservation of capital.  That's a fancy way of saying cash is a very safe investment.  If you place your money in Money Market Funds or Certificates of Deposit, then you might even be covered by the Federal Deposit Insurance Corporation, or FDIC, which means your deposit is insured against loss.

Another advantage of cash is that it prevents you from liquidating assets from other classes, such as stocks or bonds, when you have a large expense coming up.  The last thing you want to do is sell a portion of your stock portfolio during a bear market to pay for your daughter's wedding.  Holding cash is a simple way to meet these types of financial obligations.

Cash investments are also extremely liquid assets.  That means they can be quickly exchanged for products or services we need.  In most cases, all we need to do is make a simple withdrawal from an account to have immediate access to our money.

Disadvantages of Cash Investing

On the other hand, the primary disadvantage of cash has to do with the overall return on investment.  The higher rewards in life usually go to investors that are willing to take greater risks.  That means relatively safe investments, such as cash, will provide relatively low returns.

This is one of the reasons many investors spend so much time trying to figure out how much cash they need on hand.  Investing is like putting our money to work, and if too much money is sitting around idle, then we're missing out on greater returns.

Where to Invest Cash
If you're convinced that cash can, and should, play an important role in your investment portfolio, then you have four options when it comes to cash investments:

• Certificates of Deposit
• Money Market Mutual Funds
• Money Market Accounts
• High Yield Checking Accounts

Certificates of Deposit
If you're an investor searching for a relatively low risk investment, then certificates of deposits, or CDs, might be of interest to you.  A CD is nothing more than a deposit account with a thrift institution or bank, which typically offers a higher rate of interest than a savings account.  CDs normally carry Federal Deposit Insurance Coverage up to $250,000.

Purchasing a CD
With a CD, you are investing a fixed amount of cash for a fixed period of time.  The more common terms you'll find for a CD include three months, six months, one year, three or five years. Interest is paid on a CD at predetermined intervals, usually monthly.  CDs that are redeemed early are frequently subject to an early withdrawal penalty.
Before buying a CD, make sure you understand all the terms and conditions associated with the deposit, including:

• Maturity Date - find out when the CD matures, most banks will provide this information in writing.
• Early Withdrawal Penalties - determine what early withdrawal penalties exist.  Penalties are usually stated in terms such as the forfeiting of interest payments.
• Callable CDs - a callable CD gives the bank the right to call in the CD after a set period of time.  If interest rates suddenly fall, then the bank can call in the CD, which means you need to move your cash elsewhere at a most undesirable time.
• Brokered CDs - if you're planning to invest a lot of money in CDs, then you need to understand if the CD deposit is being brokered.  FDIC insurance is on a per institution basis, with a limit of $250,000.  You'll want to make sure all of your CDs are not with the same financial institution.

Money Market Mutual Funds
Money market mutual funds are mutual funds that invest in short-term debt instruments.  Money market funds invest in certificates of deposits, government securities, commercial paper of companies, and other low-risk, highly-liquid securities. Unlike other mutual funds, they attempt to keep their net asset value (NAV) at a constant $1.00 per share.

High Yield Checking / Money Market Accounts
The exact rules may vary slightly with respect to high yield checking accounts and money market accounts.  But for many of us, these two investments are nearly identical.  These types of accounts are typically offered through local banks, and allow you to write checks.

In exchange for offering higher yields than savings accounts, high yield checking and money market accounts normally have fairly high minimum balance requirements.  There may also be restrictions with respect to the number of transactions allowed each month, such as the number of checks written.  You may also be subject to penalties if you exceed these thresholds.  Banks limit the number of transactions, so they can invest the money in longer-term, higher yield securities.

The important point to remember is simply this: before investing your cash in any of the above mentioned accounts, make sure you understand all of the fund's terms and conditions.  Ultimately it's your money, and you need to fully understand the rules associated with gaining access to that money.

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