While stocks and bonds can help you meet your future needs — whether they're four or forty years off — your cash portfolio can help you provide for your immediate goals, be prepared for unforeseen emergencies, and take advantage of unexpected opportunities.
What cash and cash equivalents, such as certificates of deposit (CD) and money market accounts, provide that other investments don't is liquidity — the ability to quickly and easily convert your investment to cash without the risk of losing a lot of money. Some cash investments will offer you greater liquidity, such as check-writing privileges and instant access to your cash, while others will yield higher rates of interest but give you less liquidity. In general, the more liquidity the investment offers, the lower the rate of interest it pays.
It's a good idea to diversify your cash among a range of investments, with different levels of liquidity or different maturity dates, and paying different rates of interest. Diversification may allow you to achieve the best balance between the convenience and safety of liquidity with interest income from your cash investments.
For example, rather than putting all of your cash into a single CD or U.S. Treasury bill, you'll give yourself more flexibility if you stagger — or ladder — several CDs or Treasury bills with different maturity dates. Or you might combine the flexibility of a low-yielding money market
account with a long-term, high-yielding CD.
Don Kittell
