25 Investments: Cash

There is no more liquid investment than cash.  In essence, it is the definition of liquidity in that all other securities are converted to cash to achieve liquidity.  As noted in the introduction, a short-term government bond (Treasury bills or T-bill) is the definitional risk-free asset.  All other securities offer returns above this base level to compensate for the additional risk that they entail. (Related: How Much Cash Should I Keep in the Bank?)

Beyond physical cash bills and coins, cash held in a bank checking account is the most liquid asset there is. Other forms of cash equivalents offer very short maturity dates.  Any security with a maturity less than a year is considered a short-term cash equivalent. These include money market funds, certificates of deposit (CDs), US Treasury T-bills, commercial paper, and banker's acceptance notes.

Nearly every type of fixed income security offers a maturity date less than a year.  This includes certificates of deposit, Treasuries, Agencies (bonds based on mortgages), corporates, and municipals.  In this respect, they qualify as “cash”, or at least short-term assets and cash equivalents.   

Objectives and Risks

Cash held at a bank has a huge benefit in that it is insured by the Federal Deposit Insurance Corporation (FDIC). The current deposit insurance amount is $250,000 for an individual bank account.  Other financial institutions (such as traditional brokers) also have banking operations, so be sure to check for specific FDIC insurance coverage.

Money market and other related funds don’t carry FDIC insurance.  The distinction is important, especially for investors concerned with downside protection.  It makes little sense to stretch into risky cash-related assets since overall interest rates are low by historical standards.  Cash is mean to be safe.  

How To Buy or Sell It

Investors can hold cash by physically owning it, or opening a checking account at a bank or brokerage account.  Brokerage cash is generally held in a money market fund.  Checking account fees are usually low, or waived for certain cash minimums.  Money market expense ratios are generally also low, but stated like with a standard mutual fund.

Strengths

There is no greater liquidity than cash!

FDIC insurance

Weaknesses

Liquid investments, but returns are very low

Inflation risk – loss of purchasing power

Key Considerations

Liquidity:  High (the highest!)

Historical Returns:  Low (very)

Inflation Protection:  Low (in fact, none)