Is Cash King? Almost...

Cold. Hard. Cash.

It makes the world go ‘round.

And today, more than ever, cash is cashing in.

With interest rates at historic levels, lending your cash can earn more than ever.

Cash is King

Cash investment options, like CDs, high-yield savings, and money market funds are earning high rates, making them nearly as attractive as equity investments. These are funds that invest in high-quality, short-term debt instruments, cash, and cash equivalents.

Many of these investments are offering 4%-5% APY (remember, that’s annual percentage yield, which takes into account compounding interest). That’s more than some standard bond funds and way more than the paltry 0.25% yield a typical bank is offering.

So, naturally, money market funds are having a moment, as seen in the chart below. More than $5 trillion dollars are invested in these funds. At no time in modern history have these funds seen this much inflow.

Liquid Gold

These funds are great for liquidity. Investors like you and me can take money out in about a day or two. Money market funds are also regulated by the SEC, which imposes rules on the quality, diversity, and maturity of the securities they hold.

Money market funds also offer the potential for higher yields than conventional cash equivalents such as savings or money market accounts from a bank or credit union. Money market funds can take advantage of changing interest rates and market conditions to seek higher returns for their investors.

The attraction behind these funds is their superiority in higher earnings which exceed regular old savings accounts. Plus, you get more diversification than lending your money straight to a bank like Silicon Valley Bank (gulp). Of course, one needs to account for fees, minimum balance requirements, etc.

The Measure of a Dollar

Keep in mind, a money market fund is an investment and is NOT backed by the FDIC. (One could argue even the FDIC is having its own difficulty these days.) The fund tries to keep the value of 1 share equal to $1. This doesn’t always happen though…

If the fund company or sponsor fails or the fund breaks the buck (goes below $1 per share), the investor may lose some or all of their principal.

For example, the 2008 recession. At that time, the Reserve Primary Fund, a prominent money market fund, experienced losses due to its investments in Lehman Brothers, which filed for bankruptcy.

This caused the net asset value (NAV) of the fund to fall below $1 per share, which is known as "breaking the buck."

The breaking of the buck by the Reserve Primary Fund caused a panic in the money market industry, as investors began to withdraw their money from other money market funds.

This led to a freeze in the short-term credit markets, as companies were unable to borrow the money they needed to operate. The US government had to intervene to stabilize the industry, including guaranteeing the NAV of money market funds and providing liquidity to the market.

The breaking of the buck by the Reserve Primary Fund was a significant event that highlighted the risks of investing in money market funds.

It also led to reforms in the industry, including changes to the regulations governing money market funds and increased transparency in their investments.

So economic pressures can affect the money market system, just as much as global economic pressures can, highlighted in the illustration below.

Diversify the Cash

Everyone has a different financial landscape, and money markets play one part. It’s worth noting that an eldery man I knew kept more than $500,000 in a savings account - earning about 0.05%. If he had moved this into an account earning even 0.50%, he could’ve earned about $2,250 more.

As important as it is to diversify your investments, the same applies to your cash.

Look to have some in your checking and savings, for both daily operation and emergency uses. Beyond that, look to earn possibly more yield in a money market fund while rates are high, and perhaps allocate some to fixed-income funds for differing investment styles and time horizons.

One thing to be sure, hoarding cash and storing it in your safe will only collect dust, not yield.

Save On,

Chris