Investing perspectives on cash assets
For the greater part of 2004, short-term money rates lingered considerably below 1.00 percent. But, as the Federal Reserve raised the federal funds rate over the past 12 months, money market rates have moved up accordingly.
For example, this week the Wall Street Journal’s daily “Money Rates” feature posted a 2.76 percent yield for the benchmark Merrill Lynch Ready Assets Trust money-market fund.
While that’s a big improvement on the return from cash asset holdings, please remember that money-market rates are, historically, generally well below inflation rates. Before going into additional pros and cons of money-market accounts and funds, I’d like to make some clarify some definitions.
There are three asset classes that investors use to broadly allocate their investment dollars: stocks, bonds and cash.
In the investment world, while this last named asset certainly includes currency and money in bank accounts, the term cash is short for cash-equivalents ” i.e., certificates of deposit, banker acceptances, commercial paper, treasury bills, etc. These instruments are very easily converted to cash (liquid) with maturities measured in days. They are considered virtually riskless, i.e., the “equivalent” of cash.
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Since little or no risk is assigned to cash equivalents, their interest yields are modest, usually running below the rate of inflation. While perceived to be “secure” from a risk of principal perspective, cash investments are guaranteed losers from an investment perspective.
Over time, inflation will steadily eat away at the principal and leave you with less money than when you started.
Money-market accounts and funds should be used by investors for very specific purposes such as some short term (five years or less) expenditure or in pre-retirement planning for some critical, planned outlay of cash.
There’s nothing wrong with sitting on cash for a short period of time while considering investment options, but the return on any type of cash holding will fall far short of helping you build a retirement nest egg.
It is a matter of concern that trillions of dollars are held by investors in money-market accounts. This problem is particularly acute with 401(k) and similar retirement-plan accounts.
Close to 30 percent of the total amount of 401(k) money is held in money-market accounts and funds. Retirement-plan providers and company sponsors need to assume more responsibility for educating their plan participants on the impact of this important issue.
Other than for the reasons I’ve mentioned above, I would argue against including cash assets, or at least no more than a nominal amount, in your portfolio asset allocation planning.
In order to build an adequate retirement fund, an investor needs the returns provided by some reasonable mix of stocks and bonds. Oftentimes, some portfolio percentage for cash is recommended for conservative investors.
However, what looks safe is actually going to impair their ability to accumulate an adequate nest egg.
If you really want to dig into the topic of cash-based accounts, I would recommend spending some time on the iMoneyNet Web site: http://www.imoneynet.com. iMoneyNet is the leading provider of information about money-market mutual funds.
A subsidiary of Informa Financial Information of Westborough, Mass., iMoneyNet has been collecting money fund statistics and publishing its “Money Fund Report” since 1975.
One very useful feature on its Web site is its “Prime Retail MMFs,” which appears to be updated daily. The fund name and telephone number is provided along with yield, weighted average maturity (days), fund assets ($), and minimum investment information.
Using money-market accounts and funds in an appropriate way as a portfolio management tool makes sense. Using cash assets for long-term investment purposes will lose you “cents,” a lot of them, if you’re carrying too much of them for long periods of time.