Investment Diversification cont'd - Cash

In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:

- safety - the value stays reasonably consistent,

- liquidity - it's available with no hassle when you need it,

- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,

- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.

Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:

- plain old-fashioned bank savings account (FDIC insured),

- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,

- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,

- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.

Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.

U.S. Treasuries

Among the safest investments are U.S. Treasuries. They are backed by the full faith and credit of the U.S government. (Backed by you and me and the taxes we pay.) When you start at the bottom of the investment pyramid, Treasuries are part of your investment foundation along with savings accounts, CD's and money markets.

Essentially, when you buy a Treasury you are lending money to the government.
Because U.S Treasuries are so safe, they earn very little interest as they carry minimal risk.

U.S. Treasuries come in several durations:
A Treasury Bill, or TBill, will mature in under a year,
Treasury Notes will mature in 1, 3, 5, 7 or 10 years and
Treasury Bonds, long bonds, mature in 20 and 30 years.

The most known Treasury is the 10 year which is used as a benchmark (measuring/comparison tool) for the Treasury market and for mortgage rates.

Treasuries may be bought through a brokerage account, at a federal bank and online at www.TreasuryDirect.gov.

Be $ Smart - build your investment portfolio foundation with some U.S. Treasury bills, notes or bonds for safety and predictability.