Cash investments expose you to less risk than either stock or bonds. If they are bank deposits, like CDs, the money is insured by the FDIC. Treasury bills are backed by the federal government and their short terms limit inflation risk. However, the safety of cash investments is offset by the more modest returns that they have historically paid.
Keeping a limited amount of your portfolio in cash equivalents lets you take advantage of new investment opportunities as they arise. Equally important, if you keep three to six months’ worth of living expenses readily available in highly liquid, easily accessible cash equivalents, you can tap those assets to cover unforeseen and emergency expenses.
Their liquidity — or easy convertibility to cash — and price stability means that cash equivalents can play a role in both your saving and investing strategies. But keep in mind that these super-safe investments have their own risks.
What’s your best defense against inflation — or the gradual erosion of the purchasing power of your money? It’s a smart investing strategy and an understanding of investment risk.
