Much Ado About Cash

Who knew cash was such a hot topic?  

Usually dismissed as the dullest of all investment options, cash has nevertheless become a major conversation starter among investors trying to keep their money as safe as possible while earning at least a little bit of interest amid today's low-rate environment.

In a recent discussion board forum on Morningstar.com, readers were asked what they are doing with their cash holdings--and, boy, did they ever respond. We received more than 100 comments from readers who described how much, where, and why they are holding cash. Some are being opportunistic, waiting for the next stock market correction, while others just want a good night's sleep knowing their money is safe. All, however, lamented today's low rates on money markets and other cash vehicles. You can read the full conversation here. (And for more on this topic, read "For Safety and Yield, Where Best to Park Your Cash?" )

'A Horrible Environment for Cash'
Comments made by KitCat were typical of those expressing frustration with today's low interest rates.

"I feel I am barely doing better than sticking it in a mattress or burying it in the backyard," KitCat wrote. "I have some in an interest checking account barely getting any interest, emergency funds at a credit union in both savings and CD. Feel I'm losing value with inflation and the super-low interest all of the above earns."

"It's a sad, sad statement but I feel I'm lucky to be getting 0.9% on the online Barclays [bank savings] account," said artsdoc. "It's totally liquid and FDIC-secured. But I'm not really bragging. This is a horrible environment for cash."

"With the measly rates we are getting on any cash you may as well just stuff it in your mattress. It's cheaper than buying a new one. Sounds like the best option to me," said rideon49.

Many readers said they have been stockpiling cash in the hope or expectation that equity markets are due for a correction, which would create opportunities to buy stocks at attractive prices.

"Keeping 40% parked [in cash] and buying select stocks on the dips," reported researchguru.

Melike offered up a plan for deploying cash given current market conditions.

"The market value is concerning after a five-year bull run," Melike wrote. "I began taking assets that appreciated more than 17% annualized over the last three years and moved 10% to cash for some dry powder. Re-allocated non-cash accounts and waiting to dollar-cost average after the next 10-15% drop (hopefully not more than that will occur)."  

Safety First and Foremost
Above all, those with heavy allocations to cash stressed the desire to keep their money safe, even if it means making almost nothing on it.

"So I'm way too heavy into cash," admitted island. "What can I say? We are retired and can't afford to lose 30% of our net worth like we did in 2008 when we had no true cash at all. (Sure we recovered it all ... by 2012.) So I have most of our cash in 2.5% 5-year CDs, some sitting at Charles Schwab making nothing but liquid for investing when needed. Not too happy about it, but we are lucky enough to have enough money to be this super conservative."  

ALEX0295 wrote, "Holding 30% in cash. I'm retired and until bonds stop scaring me I feel I would have a hard time if the market does a healthy correction."

"I am about 25% cash and it's getting just 1% in a credit union money market," said stecary. "Part of it is waiting for an investment (flip) property to come along and the rest is just staying safe and will be part of a down payment when I move next spring."

One of the most extreme cash hoarders among those commenting was clrhzn, who has gone defensive while waiting out the end of the Fed's quantitative easing stimulus program.

He wrote, "Have repositioned my portfolio to 75% cash and 25% stocks. The cash positions are in money market funds at three different brokers. This position was taken at the end of July 2014. I cannot predict the outcome of the end of the QE programs by the Fed and the looming rise of interest rates. Since early August my total portfolio is up 5% and I can sleep at night knowing the major portion of the portfolio is in cash."

Almost at the other extreme was dblegl, who is keeping relatively little in cash these days.

"I only keep cash in my checking accounts sufficient to cover my expenses for the next three months," the poster wrote. "All my investments are in stocks or funds of which 90% pay dividends. I feel that cash kept in a brokerage account earns nothing and therefore is better invested and at least is earning a dividend.  Should I have an urgent need for cash the sale of a stock or fund will satisfy that requirement."

Some readers expanded the definition of "cash" beyond traditional savings vehicles such as money markets and CDs and into slightly riskier fare, such as short-term bond funds, muni-bond funds, and stable-value funds offered in many employer-sponsored retirement plans.

Vriguy said he has some of his assets in the  Vanguard Limited-Term Tax-Exempt (VMLUX) muni fund--"not really cash, but I expect it to retain 98% of its value even if rates go up a full percentage point. It just about keeps up with inflation."

Then there were those who mentioned holding a hefty cash cushion in case of emergencies, such as carman.

"We're about 10 years into retirement and have had some expected and unexpected medical issues," he said, "so we keep a healthy 16.25% of our assets in cash to handle several years of living and medical expenses. Our remaining assets are in IRAs and other defined-contribution retirement accounts and some individual taxable mutual funds."

The Bucketing Approach to Holding Cash
A number of readers described using their own customized bucketing system for their cash, with different buckets earmarked for different purposes.

"I have cash 1, cash 2, and cash 3," explained Juris2. "Cash 1: 'cash-cash' held to be spent (including emergency fund), kept in my credit union either in my draft/checking, savings, or money market accounts. Money market isn't getting more than a fraction of 1% interest. My paychecks went here until June, and soon my RMDs will go here, along with Social Security payments. I keep 6 months spending money in the credit union as a reserve or emergency fund, which I may increase after my RMD comes in. The rest is transferred to my brokerage. Cash 2: 'temporary cash' held to be invested at my brokerage (Fidelity). This is either in a cash management account (earning bupkis at this time) or my investment account. Most is being systematically dollar-cost averaged into investments over the next 10 months. Cash 3: 'invested cash' invested for value preservation (inflation protection), not for above-inflation yield or total return, in my taxable brokerage account in short-term bonds (e.g.  PIMCO Enhanced Short Maturity ETF (MINT),  iShares 1-3 Year Credit Bond (CSJ)). Mainly preservation-oriented, with hope of staying up with inflation. Most such cash is held for a possible home purchase in the next year."

Proxysteve also described his three-pronged approach to keeping cash.

"I have three places I park cash: 1. Checking account at my bank. This is for day-to-day expenses--about one month's worth. 2. Online bank paying 0.90%-0.95%. This is an emergency fund and saving for expenses more than a few months out (property taxes), and saving for future purchases (cars, house improvements, etc.). 3. Online brokerage. I don't really consider this cash. It's dry powder for buying stocks (mostly dividend-paying) when opportunity presents. I could use this for emergencies, but never have."

"First bucket of cash is at my credit union, which is paying 2.5% interest up to $10,000," wrote JesseP. "Next,  Vanguard Short-Term Bond ETF (BSV), and last a 5-year CD ladder."

Credit Unions, Online Banks Praised
JesseP was hardly alone in using a credit union for a portion of his cash holdings. Several readers said they like credit unions in part because of the higher rates some offer.

"I hold most of my cash in credit union money market accounts, which pay 1.0% interest," wrote stagionestate. "I electronically transfer cash into checking as I need it (checking only pays 0.25% interest). I also hold some I-bonds."

Mlott1 discussed his cash strategy using a specific credit union offering.

"Right now I'm letting [cash] build up in my credit union checking account," he said. "They [Del-One Federal Credit Union] have a 'Better Life' account that pays 2% on up to $25,000. The requirements are to have direct deposit, e-statements instead of paper, and use your debit/credit card at least 10 times per month. I already had direct deposit with them and had signed up for the e-statements, and, sad to say, it's not hard at all to use the debit card 10 times or more in a month.  Money is insured, immediately accessible, and in this day and age 2%, especially for a small investor/saver like me, it's not a bad deal, all things considered."

Online banks were another popular choice with readers, including FingerlakesGuy.

"I'm holding about 5% of my portfolio in Ally online CDs and money market accounts," he said. "All of the CDs are five years because when I invested in them the penalty for early withdrawal was only 90 days, so it was almost a 'no brainer.' Even if I withdrew the money within a year, I was still doing better than holding it at 1% (or less) in the money market (the CDs are paying 2%). And I didn't see interest rates increasing much for a couple of years at the time I invested in them about two years ago. I also have about 10% of my portfolio in a stable-value account in my 457 plan earning 3% with no fees. I'm going to keep a sizeable portion in there for as long as they're exceeding any other safe investments but do plan on getting back into bonds when the inevitable correction happens and will probably put some back into equities if any major correction happens there in the near future. In the meantime I sleep well at night knowing I have several years of cash available to me."