Whether you are looking for a place to stash cash for short-term needs or investing the cash held in a long-term portfolio, you have more opportunities to capture relatively high yields than you’ve had in decades. That’s largely thanks to the Fed’s interest rate hikes and a still strong economy.
The good news is the range of options for keeping your cash safe and accessible while also earning interest are extensive. But the one that’s right for you depends on your particular needs and time frame. Here are some places to consider.
Savings accounts at banks offer flexibility and insurance from the Federal Deposit Insurance Corporation (FDIC). Some brokerage firms offer cash management accounts, which automatically move cash in their clients' accounts into bank savings accounts which provide them with FDIC protection.
Liquidity and flexibility: Savings accounts are liquid. That means you can access your savings when you need or want to.
Insurance: FDIC insurance means the government would insure you against losing your money if the bank were to fail. The insurance covers losses of up to $250,000 per person, per bank, per account ownership category. That limit may require you to spread your money across accounts at several banks in order to make sure all your money is insured.
Uses: Savings accounts can be good places to put cash that you need ready access to for bill paying or emergencies.
Money market mutual funds
Money market funds are mutual funds that invest in short-term debt securities with low credit risk and yields that tend to closely track changes in the direction of the Fed’s target interest rate. There are 3 main categories of money market funds—government, prime, and municipal.
Government money market funds1 hold Treasury and other securities issued by the US government and government agencies. Prime retail2 money market funds do too, but they may also invest in securities issued by corporations. Municipal retail money market funds2 invest in debt issued by states, cities, and public agencies.
Liquidity and flexibility: Government funds, including US Treasury money market mutual funds, are priced and transact at a stable $1.00 price per share or net asset value (NAV) and are not subject to restrictions on withdrawals.
Insurance: Money market funds are not insured by the FDIC, and you could lose money investing in one. The Securities Investor Protection Corporation (SIPC) provides insurance for brokerage accounts that hold money market funds. SIPC protects against the loss of cash and securities—such as stocks and bonds—held by a customer at a financially troubled SIPC-member firm. SIPC protection is limited to $500,000 and has a cash limit of $250,000. SIPC does not protect against declines in the value of your securities and is not the same as FDIC protection. Before investing, always read a money market fund’s prospectus for policies specific to that fund.
Uses: Money market funds can offer easy access to your cash and may make sense as places to put money you might need on short notice, or that you are holding to invest when opportunities arise.
Deferred fixed annuities
A deferred fixed annuity3 is a contract with an insurance company that guarantees a specific fixed interest rate on your investment over a set period of time, generally 3 to 10 years. It is geared toward investors looking to protect a portion of their retirement savings from the effects of market volatility while locking in a competitive rate of return with minimal risk for that portion. With a deferred fixed annuity, all taxes on interest are deferred until funds are withdrawn4 and there are no IRS contribution limits.
Liquidity and flexibility: With some deferred fixed annuities, you can take annual withdrawals of up to 10% of your contract value without incurring a surrender charge. Additionally, you can choose the guarantee period length that fits your goals.
Insurance: Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Since an annuity's guarantees are only as strong as the insurance company providing them, you should consider the strength of the company you select and its ability to meet future obligations. Financial strength ratings are available from your Fidelity representative on each of the company's profiles and on Fidelity.com.
Uses: If you are looking to protect a portion of your savings with the security of a guaranteed rate of return, while also deferring taxes, then a deferred fixed annuity may be right for you.
Certificates of deposit
CDs are time-deposit accounts issued by banks in maturities from 1 month to 20 years. When you buy a CD, you agree to leave your money in the account for a specified period of time. In return, the bank pays you interest at a rate that is fixed at the beginning of that time period. CDs may offer higher yields than some other options for cash, but you may have to lock up your savings for a set period of time or pay a penalty for early withdrawal.
You can buy a CD directly from a bank, or you could buy one through a brokerage firm, known as a "brokered CD." If you buy a brokered CD at Fidelity as a new issue CD, there are no management fees or transaction costs if you hold it to maturity. Brokered CDs typically require minimum investments of $1,000. However, Fidelity offers fractional CDs with minimum investments of $100.
Liquidity and flexibility: Because you can avoid those fees and transaction costs, it makes sense to hold CDs until maturity. If you own a CD in a brokerage account and need access to your savings before maturity, you will likely have to sell it for a loss and also pay transaction fees. Banks may charge fees for early withdrawals. One way to improve access to your money and avoid fees with CDs may be by building what is known as a ladder. A ladder arranges a number of CDs with staggered maturities. This frees up a portion of your investment at preset intervals as each CD matures and with rates rising, may help you to reinvest funds at higher rates as the rungs in your CD ladder mature.
Insurance: CDs are eligible for FDIC insurance. A brokerage account can aggregate brokered CDs from different FDIC banks in one account, so you may be able to put more than $250,000 in CDs without running into the FDIC insurance limit.
Uses: Because they should be held for specific lengths of time, CDs are more useful for earning yields and preserving cash rather than for holding cash that you may need to access before the CD matures. They can also offer a simple, safe way to offset riskier assets in an IRA where you may not need access to your cash.
Individual short-duration bonds
If you have cash that you don't need access to immediately, you may want to consider putting some in short-duration bonds, which carry slightly more credit or interest-rate risk than savings accounts, money markets, or CDs, while potentially offering more return.
The 4 categories of short-duration bonds—US Treasury, corporate, tax-free municipal, and taxable municipal—offer a variety of maturities and levels of risk. Treasury bonds are backed by the full faith and credit of the US government. Corporate bonds are securities issued by companies and municipal bonds are issued by states, cities, and public agencies. Both corporate bonds and municipal bonds contain credit risk which typically rises as their advertised yields rise.
Liquidity and flexibility: Fidelity suggests holding short-term bonds until maturity. You can sell your bonds before maturity if you choose. However, you may not be able to find a buyer, forcing you to accept a lower price if you need to sell your bond. If interest rates rise, the price of your bond will fall, so if rates have gone up since you bought your bond, you may experience a loss if you sell it before maturity. These risks mean it is important to consider whether a bond is an appropriate alternative investment for your cash. You should also try to diversify among individual bonds, perhaps by holding a number of securities from different issuers. You may need to invest a significant amount of money to achieve diversification. You also have to pay fees when you buy or sell individual bonds in the secondary market. Like CDs, bonds can be laddered.
Insurance: SIPC insurance is available for brokerage accounts that hold bonds, subject to the limits previously mentioned.
Uses: Short-term bonds' prices can rise and fall more than those of other cash alternatives, so they are more useful for those willing to hold them until they mature than for those who may need cash soon.
Short-duration bond funds
Some bond funds track the performance of an index while others are actively managed using professional credit research and portfolio construction. Those services come with fees. Fidelity's Mutual Fund Evaluator can provide examples of short-duration bond funds. You should do your own research to find bond funds that fit your time horizon, financial circumstances, risk tolerance, and unique goals.
Liquidity and flexibility: You can buy and sell bond funds each day. Most bond funds have no maturity date, so your return will reflect the market prices of the bonds held by the fund at the time you decide to buy and sell. The value of your investment will change as the prices of the bonds in the fund's portfolio shift, and those market moves could add to your yield, or reduce it.
Insurance: SIPC insurance is available.
Uses: Similar to a diversified portfolio of individual short-term bonds, bond funds are better for earning yield over time, rather than for use in emergency funds or for cash needed to pay for anticipated expenses. Keep in mind, though, unlike investments which offer a specific rate at the time you purchase them, you do not know in advance what the return on a bond fund will be.
Consider your goals, both long term and short term
As you think about whether to stay in cash or to invest, think about the role cash plays in your overall financial plan. How much do you need to pay for your expenses, both planned and unexpected? How much do you need for a major expense such as college tuition within the next few years? Are you willing to accept lower returns from your investment portfolio in the future that could result from keeping more money in cash, rather than investing it in stocks and bonds?
How long should you stay in cash?
Holding significant amounts of cash may provide reassurance during market volatility. But over the long term, leaving overly large amounts of cash uninvested in your portfolio can be a drawback. Historically, both stocks and bonds have delivered higher returns than cash, and professional investors are careful to avoid over-allocating assets to cash. For this reason, investment management services such as those offered by Fidelity's managed accounts do not allocate large amounts of money to cash, but instead stay invested.
If you can't tolerate the ups and downs of the stocks in your portfolio, however, consider a less volatile mix of investments that you can stick with. For example, among Fidelity's managed account solutions there are mixes of defensive stocks and bonds specifically chosen to minimize the overall volatility of the portfolio. (Read Viewpoints on Fidelity.com: Seeking shelter in volatile markets.)
Fidelity can help you find the right mix of cash and investments
Creating a plan is just one of the services that we offer our clients. We can also help manage your portfolio by looking at your situation—your timeline, goals, and feelings about risk—and creating a mix of investments that’s right for you. Find out more about managed accounts.