Cash and
cash
equivalent investments,
such as
money
market funds,
certificates
of deposit,
and
Treasury bills,
are low-risk investments that pay interest. Their
short terms and stable values mean they generally provide smaller
returns than the other major asset classes. But they have one
big advantage — they’re highly
liquid,
which means you can turn them into cash at any time without a
major loss in value.
The rate of interest that cash investments
pay is often not enough to offset the effects of
inflation,
or
the gradual erosion of the buying power of your money. So if you’re
seeking long-term growth, you’ll want to limit the amount
of money you allocate to cash investments. Nonetheless, cash investments
can play a role in a well-balanced portfolio — to provide
liquidity to meet shorter-term goals, emergency expenses, and
to make new investments when the opportunity arises, or to provide
a buffer against the fluctuation in value of more volatile
securities.
