- In deciding whether and when to invest your cash, you need to consider your goals, time frame, attitude, and needs.
- Your Fidelity advisor can work with you develop a plan to help you invest your cash for the long term.
- Investors have a variety of places to hold cash that they don't want to invest, including savings accounts, money market funds, certificates of deposit (CDs), and short-term bonds.
- Fidelity's managed account solutions can help investors who now hold cash to return to investing.
If you are like most people, you probably have some cash in a checking account for day-to-day spending, some savings for major purchases or unexpected expenses, and hopefully, an emergency fund with enough cash to pay for 3 to 6 months' worth of household expenses. You may also have more cash sitting idle in your investment accounts and you're considering what to do with it, both now and in the future.
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.
While your Fidelity advisor can help you plan for investing your cash for the long term, you also have a number of places to keep your cash in the short and medium term that seek to provide safety and flexibility, as well as opportunities to earn some interest. Here are some places to keep your cash with the goals of keeping it safe and accessible, and earning interest as well .
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. There are 3 main categories of money market funds—government, prime, and municipal.
Government funds1 hold Treasury and other securities issued by the US government and government agencies. Prime retail2 and institutional3 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 the potential restrictions on withdrawals such as liquidity fees or redemption gates.
During periods of extraordinary stress, both retail and institutional prime and municipal money market mutual funds may charge redeeming shareholders liquidity fees or provide for redemption gates that would temporarily halt all withdrawals.
Insurance: Money market funds are not insured by the FDIC. 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.
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.
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 as a new issue, there are no transaction costs or management fees at Fidelity.
Liquidity and flexibility: 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 might 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.
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.
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 seeking income over the longer term than for holding cash that you may need 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.
Longer-term questions—and answers
If you have cash, you not only have options to consider about where to put it now, but you also need to decide how much of it to invest for the future in stocks and bonds as well as how to do so.
History shows that investing in stocks and bonds rather than sitting in cash can make a significant difference in investors' long-term success. The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50% might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.
From June of 2008 through the end of 2017, those who stayed invested saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That's twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009. While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact. More than 25% of those who sold out of stocks never got back into the market and missed the gains that followed.
If you can't tolerate the ups and downs of the stocks in your portfolio, 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.)
Your Fidelity advisor 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.