While Tech Stocks Are Hot, Cash Is Cool

While Tech Stocks Are Hot, Cash Is Cool

Over the last 15 years, cash has fallen out of favor as it didn’t earn much and was a drag on portfolios while other assets soared. But now, cash is a valuable asset, not just as a defense but as an offense too, contends Jason Zweig in an article in The Wall Street Journal. U.S. Treasury notes and bank certificates of deposit are yielding 5% or move, allowing them to be competitive with stocks. At 5% or more, every cash dollar “sells” for about 19 times earnings, and while U.S. stocks are trading at roughly the same rate, they don’t offer any protection against loss the way cash does.

Accounts that are earmarked for specific purposes that you may need to dip into soon, such as a college savings account or part of your 401(k) if you’re close to retirement, are ideal reservoirs to keep more cash than usual given the current generous yield. In order to attract deposits and strengthen their balance sheets, some regional banks that have been negatively impacted by the banking crisis earlier this year are offering CDs that pay substantial yields. For investors looking to take advantage of the weakened banking sector, it makes more sense to buy the CDs than purchase stocks, because the FDIC will protect the CDs against loss—a benefit you can’t get with stocks. And CDs have an advantage over stocks when it comes to interest rates; if rates go down or stay the same, investors keep their CDs, but if the rates go up, investors could redeem the CD and get out ahead, even if they have to pay a penalty for early-withdrawal. And though the interest on CDs is subject to state and local income taxes, unlike U.S. Treasurys, you’re still likely to come out ahead at the current yields, unless you live in a high-tax state like New York or California, the article posits.

CDs with maturities between one and five years are “the sweet spot,” Zweig writes—below one year, Treasurys and money-market funds offer a better return for CDs. Websites such as DepositAccounts.com and Bankrate.com are where investors can go to purchase them. Investors should take note of what the early-withdrawal penalty is on any CD they buy, and make sure it isn’t too onerous. But even investors with a long horizon should take advantage of this type of short-term opportunity when it arises, Zweig maintains.