Fidelity Investments' features an article on "What to do with your cash in its latest "Viewpoints" market update. Subtitled, "To find income potential you may have to confront risk," the piece says, "For the past several years investors have had to contend with paltry yields on money market funds, CDs, and other cash equivalents. With interest rates so low, you may have wondered if you should just stuff your cash under a mattress. But while finding yield in the short-term market is challenging, it isn't impossible. You may be able to boost the income your cash allocation produces -- but the downside is that you have to take on greater risk."
Chris Sharpe, portfolio manager on Fidelity's asset allocation team, comments, "There are opportunities out there to get more yield from your short-term investments. But you have to understand the potential risks.... The decision comes down to your needs: the role this allocation plays in your overall portfolio, and what you hope to get out of it given your needs and time horizon."
Fidelity explains, "To determine whether it makes sense to accept greater risk in exchange for greater yield potential, consider the purpose for your cash investments. In some cases you may require absolute stability, but in others you may be willing to accept the possibility of minor principal declines in exchange for higher interest payments."
They explain about low yields, "The Federal Reserve in December 2008 cut the target federal funds rate -- a key benchmark for short-term interest rates -- to a record-low range between 0.00% and 0.25%. The Fed's goal was to help pull the U.S. economy out of a deep recession and financial crisis. Many experts expected that rates would rise back to more normal levels after the economy stabilized. But nearly three years later, high unemployment and a halting recovery have persuaded the Fed to keep this influential short-term rate at its historical low point."
They say, "The low federal funds rate has acted as an anchor on yields offered by short-term instruments such as CDs, deposit and savings accounts, money market funds, and other short-term bond funds.... Yields on Treasury bills with maturities of three months or shorter hover around 0.00%, and have even dipped into negative territory when nervous investors flock to the highest-quality securities."
Fidelity tells us, "Some shorter-term investment options offer significantly more yield than money funds and T-bills. They generally have either lower credit ratings or longer maturities than the securities that make up traditional cash holdings. Those characteristics make the securities more vulnerable to declines -- but you may be able to stomach minor downturns in your principal value, depending on the use you have in mind for your money. In general, most investors manage the risk level of their portfolios by making decisions about the equity allocation or fixed income allocation. But to a lesser extent, you can make these same choices within the short-term portion of your portfolio."
Finally, Fidelity's Viewpoints says, "When deciding how to invest your cash, make liquidity -- how quickly you need access to the money -- a central consideration. In general, the more comfortable you are with risk and the less liquidity you need, the more yield you can afford to pursue.... Even in low rate environments, there are ways to increase the returns on short-term investments. But with investing, there is no free lunch. More yield generally requires assuming more risk. The key: make sure your choices match up with your goals, and your personal tolerance for risk."
