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You buckled down when this recession started and you kept saving cash. You know cash is king. Fortunately, you are now building up a little cash. Maybe you've cut costs and collected some receivables. The financial gurus know that you are building up a little cash and they are competing for your business. The stockbrokers are hurting just like the rest of us and they make there living from commissions on the sale of investments. What do you do when they are your long time business advisors and they contact you with an opportunity to buy in the market at an all time low?
What are Cash Investments?
The first thing you need to do is be informed about what are cash investments. You have worked hard to remain in business and stockpile this cash. No matter how 'good' a new investment seems, remember your portfolio is weighted towards cash and risk investments already. Your business is the risky side and your cash is all you have to balance that risk.
Your best course of action will probably NOT be to add to the risky side, but instead complement the cash side. Focus your attention on one risky investment - your business. Don't worry yourself further by trying to split your attention between your business and other risky investments - you won't win.
Invest in Cash and Cash Equivalents
So, how do you complement the cash side? You have to know that you only want to invest in cash and cash equivalents. Those are the buzz words and they effectively mean - I want interest on my money, but I don't want to lose principal and I must have access to it if I need it.
There is a down side to this cash investing and that is the return. Interest on cash and cash equivalents are almost always lower than stocks and mutual funds. That is the formula for risk and return. More risk equates to higher POTENTIAL return and less risk, lower return. Now you understand why your money market account is only earning 0.8% instead of 5% or 6%.
Your financial advisor is still your best resource for obtaining cash investments, but you have to guide them. You have to be sure that they understand what you want and that they limit your choices to investments that fall in that category. Here is a list of some investments that fit this description of cash equivalents, but there are many others.
- money market accounts
- short and medium term certificates of deposit
- staggering long term certificates of deposit
- treasury bills
- municipal bonds (if you can find one)
- guaranteed principal investments (if you can find a short term one)
However, be warry of mutual funds that trade at a daily price. Those types of funds are investments that can lose principal. For example, assume you are buying a 'cash' mutual fund at a price of $1.00 per share. Look at the history. Has it traded for 90 cents recently? If it has traded under $1.00 per share, it has the ability to lose principal. There are some valid money market accounts that trade in shares and look similar to a mutual fund.
Talk to Your Financial Advisor
In order to invest in the proper fund, you need to ask your financial advisor questions. Your financial advisor will be quick to tell you how to get into a fund. Be sure you ask how you get out. Ask how long it takes to receive your funds. Ask what the fees are for getting out. Ask about fees that are charged if you do not stay in the fund for a given length of time. Ask about the history of the trading prices for that particular investment. The key - be informed!
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