Investors who’ve been shell-shocked by the tumble of financial markets, falling house prices, bank collapses and the general economic malaise of the last year can be forgiven for wondering if there’s a safe place left to invest any surplus cash that, in spite of it all, they may have managed to accumulate.
Is it best just to squirrel your cash away in a mattress, or are there still ways for a prudent investor to make some money in today’s market without incurring undue risk?
Warren Buffett, that sage investor from Omaha, Neb., was recently quoted as saying that the worst investment you can have today is cash. But he was referring to long-term investing. In the short-term, according to many investment advisors, cash equivalents such as CDs and money-market mutual funds can be a good low-risk choice. Unfortunately, the returns are also low, currently averaging only 1.27 percent for a six-month bank CD and 0.5 percent for money-market accounts held at banks that are participating in the FDICguaranteed TAG program.
Nevertheless, holding cash — even as part of a longer-term investment strategy — can still be a very good idea, according to Justin Sinnott, vice president of Charles Schwab & Co.’s Seattle office. He encourages clients to keep a cash reserve representing three to six months of income so that an emergency, such as a job loss, will not mean having to liquidate long-term investments in an untimely way.
Sinnott, like many investment advisors, believes that each investor’s situation is different and that the starting process for investment decision-making should be answering some fundamental questions, such as “What is my long-term financial goal?” and “What level of risk am I able to tolerate?”
Bruce Horne, senior investment advisor with Wells Fargo Private Bank in Bellevue, agrees. With regard to risk, for example,
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