How To Invest The Cash In Your Portfolio?

Answer 1

Every well invested and diversified portfolio should have at least a small allocation to cash. Even if the position isn’t large enough to help minimize overall portfolio risk, having extra cash on hand allows you to take advantage of buying opportunities that may appear. But just the simple question of how should you invest the cash position in your portfolio shouldn’t be one that you take lightly.

Your primary options will be those investments that stress capital preservation above all else. A simple checking account might do the trick for you. The money will be safe, liquid and covered by FDIC insurance so you don’t have to worry about it not being there. The drawback is that you likely won’t earn any return on the balance which might or might not be a problem depending on how much cash you plan on carrying.

A bank money market account might work too. With this account you’ll have the FDIC insurance but also earn a return on your cash balance. The downside here is that you might need to maintain a $5000-$10,000 in order to maintain the account. Otherwise, you’ll likely get dinged with maintenance fees that will negate any return you might see.

A money market mutual fund could be a happy middle ground. These don’t have the FDIC insurance of their bank counterparts but historically at least have never lost money. That means they’re very safe while providing a return that is typically higher than bank products. Plus, some will let you open an account for just a few hundred dollars.

Your last choice for the cash portion of your portfolio should be CDs. You may have the FDIC insurance and may be able to get a higher rate courtesy of a longer term CD but they have no regular liquidity. If you need the money to take advantage of a buying opportunity or to pay for an unexpected expense (job loss, car accident, etc.), you won’t be able to get access to the money without paying a significant early withdrawal fee. Stay away from CDs for this purpose if at all possible.