Even though the stock market has been showing signs of stability over the past few weeks, the recession is ongoing and plenty of investors may remain paralyzed and shocked over the events of the past six months. Some maintain the attitude that stocks and even bonds are too volatile and sticking with cash investments is the best idea at this point. Others believe the market is headed lower in the short-run so it makes sense financially to keep plenty of cash on hand. Regardless of the reasons, here are some tips for cash-heavy investors who want to stay relatively safe and perhaps earn a little interest on their money.
First, try to keep a maximum of $100,000 with each bank. You may have heard that the FDIC raised its coverage limit to $250,000 back in October in response to bank failures and fears of depression-style bank runs. They did and will continue to keep the coverage at $250,000 until December 31st of this year, at which point it will revert back to $100,000. Only for IRA accounts will the increased coverage be maintained. One way to skirt around this rule if you truly don’t feel like having accounts with multiple banks is by having various registrations. For example, joint accounts are treated differently from individual accounts in the eyes of the FDIC. If you’re married, you could have up to $250,000 (until December 31st) in a joint account and another $250,000 in individual accounts. If you have IRA accounts with your bank (I don’t recommend investing for retirement through a bank but in case you do) those accounts are treated separately and also covered up to $250,000 right now.
Next, I’d be cautious about locking in right now on fixed-rate investments such as CDs and Treasury Bonds. The safety mentality is so dominant at this point that yields are near zero for many common cash investments. If you’re only going to earn a few extra dollars by locking in for five years versus one year, it may be smarter to wait. My feeling is that as better economic data flows in and investors get bored of the low returns offered by CDs, savings accounts and Treasury investments, they may move farther up the risk spectrum into corporate bonds, stocks and other investments with the potential for higher returns. If the recession ends by early 2010, we could see the Fed raise interest rates to combat the potential inflation which will arise as a result of the trillions of new dollars entering our economy from the various stimulus policies. If this happens, fixed-rate investments could start paying out more interest.
If you subscribe to the similarities between the current economy and that of the late 70’s, you may be looking for other defensive plays which typically perform better than cash during inflationary periods. This would include exposure to Gold, Silver, and Oil. Clearly investments correlated to commodities and precious metals will be more volatile than a CD or Treasury Bond, but it may be a smart way to diversify if the value of cash erodes over the next twelve months. An investor might also consider buying TIPS (treasury inflation-protected securities). The yield on TIPS are extremely low right now but the price is indexed to inflation, meaning the securities can appreciate in value if the CPI (consumer price index) moves up.
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