David Knoble, CPA, PLLC

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What are Cash Investments?

You buck­led down when this reces­sion started and you kept sav­ing cash.  You know cash is king.  For­tu­nately, you are now build­ing up a lit­tle cash.  The finan­cial gurus know that you are build­ing up a lit­tle cash and they are after it with gnash­ing teeth.  The stock­bro­kers are hurt­ing just like the rest of us and they make there liv­ing from com­mis­sions on the sale of invest­ments.  What do you do when they are your long time busi­ness advi­sors and they con­tact you with an oppor­tu­nity to buy in the mar­ket at an all time low?

The first thing you need to do is be informed about what are cash invest­ments.  You have worked hard to remain in busi­ness and stock­pile this cash.  No mat­ter how ‘good’ a new invest­ment seems, remem­ber your port­fo­lio is weighted towards cash and risk invest­ments already.  Your busi­ness is the risky side and your cash is all you have to bal­ance that risk.

Your best course of action will prob­a­bly NOT be to add to the risky side, but instead com­ple­ment the cash side.  Focus your atten­tion on one risky invest­ment — your buisi­ness.  Don’t worry your­self fur­ther by try­ing to split your atten­tion between your busi­ness and other risky invest­ments — you won’t win.

So, how do you com­ple­ment the cash side?  You have to know that you only want to invest in cash and cash equiv­a­lents.  Those are the buzz words and they effec­tively mean — I want inter­est on my money, but I don’t want to lose prin­ci­pal and I must have access to it if I need it.

There is a down side to this cash invest­ing and that is the return.  Inter­est on cash and cash equiv­a­lents are almost always lower than stocks and mutual funds.  That is the for­mula for risk and return.  More risk equates to higher POTENTIAL return and less risk, lower return.  Now you under­stand why your money mar­ket account is only earn­ing 0.8% instead of 5% or 6%.

Your finan­cial advi­sor is still your best resource for obtain­ing cash invest­ments, but you have to guide them.  You have to be sure that they under­stand what you want and that they limit your choices to invest­ments that fall in that cat­e­gory.  Here is a list of some invest­ments that fit this descrip­tion of cash equiv­a­lents, but there are many others.

  • money mar­ket accounts
  • short and medium term cer­tifi­cates of deposit
  • stag­ger­ing long term cer­tifi­cates of deposit
  • trea­sury bills
  • munic­i­pal bonds (if you can find one)
  • guar­an­teed prin­ci­pal invest­ments (if you can find a short term one)

How­ever, be warry of mutual funds that trade at a daily price.  Those types of funds are invest­ments that can lose prin­ci­pal.  For exam­ple, assume you are buy­ing a ‘cash’ mutual fund at a price of $1.00 per share.  Look at the his­tory.  Has it traded for 90 cents recently?  If it has traded under $1.00 per share, it has the abil­ity to lose prin­ci­pal.  There are some valid money mar­ket accounts that trade in shares and look sim­i­lar to a mutual fund.

In order to invest in the proper fund, you need to ask your finan­cial advi­sor ques­tions.  Your finan­cial advi­sor will be quick to tell you how to get into a fund.  Be sure you ask how you get out.  Ask how long it takes to receive your funds. Ask what the fees are for get­ting out.  Ask about fees that are charged if you do not stay in the fund for a given length of time.  Ask about the his­tory of the trad­ing prices for that partcu­lar invest­ment.  The key — be informed!

© 2009, david.knoble
by David Kno­ble, CPA, PLLC
Serv­ing Non-Profits, Busi­nesses & Indi­vid­u­als
Rock Hill, SC

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