Wednesday, June 2, 2010, AM | 1 Comment
Interest income from investing cash in Certificate of Deposit (CD) or Money Market (MM) funds is hard to come by in this recessionary economy. If you can gain a percent or two, you will be the darling of your family or perhaps the entire neighborhood. But that does not mean you should oppose or resist change with your current investment strategies. Safety and liquidity of your Nest Egg require constantly paying close and continuous attention – maybe more so in these economic hard times.
Today’s economy has created an environment of historically low interest rates and folks still have fresh memories of the financial crisis in their minds and hearts. Making any sort of change to your cash-management strategy can seem that you are departing from established standards of investments.
Let’s examine some options that are available to you:
Experts suggest money-market funds are one of the few areas of investment that, recently, have been largely replenished and rehabilitated. Since the collapse of Reserve Primary Fund in September 2008 when it lowered its share price below $1 – commonly known as “breaking the buck”, money funds have partially regained their reputations as a safe haven for principal preservation. As of mid-April, however, the yield on these funds averaged less than 0.1%.
Certificate of Deposit (CD)
For the short-term investment, it’s probably not wise to buy even a 6- or 12-month CD. You would be locking in the lowest yield you have ever seen.
Floating-rate notes are bonds with a short-term variable-rate coupon that resets periodically. It may yield more because of a sell-off by money-market funds. (Money markets can no longer use the reset date as the final maturity.) These “floaters”, as they are commonly called, also provide protection in a rising rate environment.
In a Nutshell
Interest rates have nowhere to go but up. If you invest in a longer-dated security, the price of that security, when it matures, will be less than what you paid for.