Where Would You Stash Your Cash?

by | Mar 6, 2009 | Cash Flow, Weekly Column | 1 comment

panick.jpgI’ve never seen more panic among investors. The continuation of the market crash seems to be causing even the most steadfast investor to consider cashing out of the market before there is “nothing left.” When our brains perceive that our survival is threatened, rational thinking goes out the window.

If you are feeling panic and an urge to get out of the markets, first ask yourself the following question: If you cash out, what will you do with the money? Let’s say you are retired, or soon to be, and you have $1,000,000 in a diversified portfolio with 60 percent in stocks, REITS, and commodities and 40% in bonds and cash. Such a portfolio has generated over 7% annually over the past 10 years, even after last year. But it lost 25% last year, is down another 10% this year, and you’re getting scared and think maybe you’d better preserve what you have. You need this money to generate an income of $42,000 a year. What are your options?

If you cashed out, where would you put that cash? In a money market fund or your bank? Yet if we are on the verge of a catastrophe, as described by President Obama, is your bank really safe? Anything over $250,000 is stash-cash.jpgnot guaranteed, so you would need to put your money in four different banks.

Treasury bills would be a safer alternative, since they are backed by the U.S. Government. However, both bank money markets and T-bills are paying about .05% right now, which generates only about $500 a year, or $40 a month. Bank CD’s are much better, but still only pay around 2.0%, or $20,000 annually, and give no protection against inflation.

A better option might be Treasury Inflation Protected Securities (TIPS). These 10- to 30-year bonds issued by the U.S. government index your principal to inflation and additionally pay about 2.0%. This is a far better alternative, especially if Uncle Sam cranks up the printing press in a few years in an attempt to monetize the staggering debt we’re incurring. This would net $20,000 a year, or $1,600 a month, still short of what’s needed.

What are some other options? Well, there are currently some tempting bargains out there. AAA rated corporate bonds are yielding 5% or more, which in today’s deflationary environment would completely meet your income needs, producing $50,000 a year. High yield bonds would return even more, but have higher risk. The risk of bonds, however, is that the company may fail or inflation erode the buying power in the future.

Rather than buy all bonds, and to guard against inflation, you could add some real estate investment trusts (REITS). Many of those are yielding 7% to 10% and would produce double the yield needed. You could even add some dividend-paying stocks, which are yielding 3% to 5%.

There are actually so many good options that the best option might be to add a little bit of each one. Altogether, you would have enough to provide the income you needed, with a little left over to increase the portfolio.

But wait a minute. That’s exactly the type of portfolio you already own—the one you’re wanting to sell.

focus.jpgIt’s easy to panic if you focus on the devastating losses from the past 18 months. Instead, try focusing on your present condition and the options you have today to generate income and recover what you’ve lost. Try looking at your current portfolio amount as if it were cash. Then ask yourself, “If all I had today was cash, what would I do with it?”

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