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By Christine Benz | 07-24-2014 11:00 AM

Squeeze More Out of Cash Accounts

Investors can wring more yield from their cash by using online banks, says Gary Zimmerman, founder of cash-management solution Max.

Christine Benz: Hi, I'm Christine Benz for With cash yielding next to nothing, many investors are wondering about where to go for more yield.

Joining me to discuss that topic is Gary Zimmerman, whose firm helps high net worth investors maximize the yield on their cash accounts.

Gary, thank you so much for being here.

Gary Zimmerman: Thank you for having me, Christine.

Benz: Let's talk about the key reasons that investors might want cash in their portfolios. They might want an emergency fund, for example. Are there any other reasons to have cash holdings?

Zimmerman: Certainly. In fact Americans right now are sitting on quite a lot of cash. The average American household has about 40% of their net worth in cash today. Even among households with larger amounts of money--households with more than $1 million of investable assets--are sitting on about 31% cash. So there's a heavy allocation of cash, and I think your question is a good one, which is why are people sitting on so much cash?

Part of it, I think, is the traditional reason, which is that people are worried about extraordinary events in life: a job loss, medical expenses, that sort of thing. So there's a certain amount of reserve that people like to hold to keep themselves comfortable. Another reason that I think a lot of households are sitting on more cash than they historically have is that people have rotated out of certain asset classes.

I know personally I divested all of my fixed-income holdings about a year and half ago, with rates seeming that they were only going to go up and so bond prices will only go down. That cash, while it's no longer in fixed income, you may not want to reinvest that in equities or real estate or other asset classes.

The third reason is more tactical, and I know different people have different views on tactical asset allocation. But if you think back to the financial crisis, there are a number of people who said, if I'd only had extra cash on the sidelines, then I would've been able to buy when the market was at very distressed levels. I think there's a portion of cash holdings that are being held for that purpose.

Benz: The dry powder argument.

Zimmerman: Exactly.

Benz: There is obviously an opportunity cost, though, to holding too much cash. Even this year, a lot of people thought, interest rates are only going to go up, and in fact yields have come down, and that's been good for bonds.

So how do investors navigate this question of how much cash to hold? If they are trying to be prudent, maybe trying to keep a little bit of dry powder aside, what are some rules of thumb that people can use to make sure that they are not holding too much?

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