Where you should (and shouldn't) keep your cash

By Walter Updegrave, senior editor


(Money Magazine) -- Question: My wife and I have $25,000 in a money market account earning almost nothing in interest. We would like to place $20,000 in some kind of an account that will give us a better return. This is our emergency money, so we'd like to invest it in something fairly safe. We also need to be able access the funds if necessary. I've had suggestions to invest in bonds, CDs and another money market account. Do you have any suggestions or recommendations? --Ted Graham, Grandville, MIchigan

Answer: Any time interest rates fall anywhere close to the levels we're seeing today, you can be sure that many people will be looking for some way to grab a higher yield without sacrificing safety.

walter_updegrave__2009b.03.jpg

And you can also be sure that there are going to be any number of seemingly secure investments to cater to that desire.

Unfortunately, higher returns don't come without higher risk. Risk and return go together, kind of like politicians and spending.

Which is what investors found out when investments such as auction rate preferred securities and bank loan funds -- which had been promoted as alternatives to money-market funds -- imploded in 2008.

Some things never change.

Today, with interest rates on money funds scraping along below 1% and yields on short-term CDs not much higher, income-hungry investors are still eager to find higher yields -- and many advisers and financial firms are just as eager to oblige.

But make no mistake -- stretching for yield means taking on more risk.

Sometimes, that risk may result from the way the investment is designed. Take reverse convertible notes, which are securities with payouts tied to the value of a particular stock. Earlier this year these securities -- sometimes referred to as "revertible notes" -- were touting coupon rates of 10% or more.

What some investors drawn to that figure may not understand, however, is that if the price of the underlying stock dives, the return can plummet, possibly even leading to a loss of principal. For this and other reasons, FINRA, the Financial Industry Regulatory Authority, recently issued an Investor Alert about reverse convertibles.

In other cases, the creditworthiness of the company offering the higher-yielding investment may be a concern. For example, an ad that has recently appeared in the business section of The New York Times touts "High Interest Rate Deposits." The copy goes on to read: "6% return instead of 1.5%. It just makes good sense!"

That's not the conclusion I came to when, after calling the phone number in the ad, I found that this wasn't a bank deposit, but what was described to me as "an equity voucher." As far as I could tell, that means you're buying unsecured debt issued by a company that the representative said had been in business "about a year."

My already faltering confidence crumbled more when I discovered that the person who assured me over the phone that I would get a guaranteed 6% return had in July signed a consent order with the U.S. Commodity Futures Trading Commission essentially barring him from the commodities biz and requiring him to pay $10,000 in restitution and a $30,000 penalty for, among other things, telling "customers that they could earn large profits trading in commodity options while failing to disclose adequately the risk of loss inherent" in that activity.

The lesson here is that if you're reaching for more yield, then one way or another, you're accepting more risk. There's just no way you're going to find an investment that offers the same security of principal as money funds, money-market accounts, savings account and short-term CDs with significantly higher yields than those vehicles.

Yes, you could move some of your money into a bond fund for a shot at a higher payout. But the value of your fund will take a hit if interest rates rise. The longer the maturity of the bond fund -- and the bigger the rise in interest rates -- the bigger the hit.

So my suggestion is if this $25,000 is really your emergency money and you want to have ready access to it and you don't want to put your principal at risk, then stick to secure investments like high-quality money funds, short-term CDs and true FDIC-insured bank deposits.

Granted, they're all paying paltry returns right now. But at least you can rest easy knowing that your money will be there when you need it. And that's the point of having an emergency fund anyway, isn't it? To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.01%4.03%
15 yr fixed3.12%2.97%
5/1 ARM3.11%2.99%
30 yr refi4.04%4.09%
15 yr refi3.15%3.05%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,804.80 26.65 0.15%
Nasdaq 4,765.38 16.98 0.36%
S&P 500 2,070.65 9.42 0.46%
Treasuries 2.18 -0.03 -1.27%
Data as of 2:10am ET
Company Price Change % Change
Bank of America Corp... 17.62 0.09 0.51%
Apple Inc 111.78 -0.87 -0.77%
General Electric Co 25.62 0.48 1.91%
Intel Corp 36.37 -0.65 -1.76%
Microsoft Corp 47.66 0.14 0.29%
Data as of Dec 19

Sections

New York Magazine reporter Jessica Pressler, who has been caught up in controversy this past week, will not be moving on to a new job at Bloomberg News. More

Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More

Forums in dark corners of the web sell the kinds of hacks that befell Sony. More

Unilever sued Hampton Creek over its egg-free mayonnaise spread Just Mayo. But the company behind Best Foods and Hellman's mayonnaise has now dropped the lawsuit. More

The income of the top 1% jumped significantly in 2012, far outpacing inflation. Not only did this group make a larger share of the country's income, their share of total taxes also jumped from 35% to 38%. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.