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Why cash doesn’t work anymore!

by | Dec 18, 2020 | Blog

For Property Managers, Real Estate Investors, Collateralized Loans, Non-Profits, Foundations, ESOP’s, Corporate Cash Reserves.

Gone are the days of fair interest rates on cash reserves.  The Federal Reserve has signaled that interest rates will remain low in the future.  The new administration has appointed Janet Yellen as Treasury Secretary, who is popular for her dovish monetary policy (essentially meaning she is known for keeping interest rates low).  Additionally, the backdrop of COVID-19 and the economic impact has steered reserve dollars into alternative assets outside of cash like instruments.

We recently put out a blog about the rise of cryptocurrency and what it is, how it is traded, and how is it priced.  https://grwealthplan.com/blog/the-bitcoin-craze/.  We wrote the blog because we have seen another spike in activity in cryptocurrency  because it has gained popularity and a sense of legitimacy due to major investments from large corporations and notable affluent investors adding the currency to their portfolios.  We are not encouraging or recommending cryptocurrency, this is just an example that indicates that fiduciaries are looking in alternative places for yield and/or appreciation with interest rates near zero.  Cash is becoming a deteriorating investment that can not outpace inflation growth.

One would not expect a return to a 4% interest rate on cash.  The traditional thinking of reserve cash and how it is handled in foundations, association, and corporations needs to evolve in a world where 0% interest rates are not only a concept, but a reality that is with us for the indefinite future.  The rules behind being a fiduciary on cash reserves typically require the fiduciaries to act in a fair and reasonable fashion looking out for what is best for the entity and not for your own benefit or wellbeing.  In that definition, there is no statement that one must protect principal, but must act in the best interest of the entity they represent.  Some investment philosophies are defined and put restraints on the types on investments that can be used.  Most do not have a true outline, and most should be updated.

When placed with the responsibility of cash reserves, weighing out the pros and the cons of the current environment is essential.  Is it in the best interest of the entity to keep the money in low interest bearing cash as opposed to finding other methodologies of safely investing the funds?  That can be challenged, even though it can also be reasoned that it is appropriate.  The reform of money market funds in 2016 provided safety in these higher yielding investments versus that of a savings account.  Planning around the needs of the funds and making prudent investment decisions based upon the goal of the entity is quintessential to success.  Use that plan to outline the investment philosophy.

Alternative Investment Ideas:

  • SIPC vs FDIC – SIPC is insurance for default of brokerage versus FIDC for cash
    • SIPC firms can buy up for higher than the $500k.  FDIC limits $250k
  • Money Market Funds or Ultra Short Duration Funds
  • Municipal bonds
  • Select ETF’s (exchange traded funds)
  • Laddering out CD’s (certificates of deposit) and bonds
  • Consider having a small amount of the funds invested for growth if the rest of the operating portion is reserved as cash
  • Even bitcoin can be considered in this new environment.

What to consider staying away from?

  • Individual Equities and Penny Stocks
  • Stock Mutual Funds
  • Unregistered securities
  • Illiquid Securities
  • Private Placements

Consult your legal documents, bylaws, CPA, attorney, and professional fiduciary investment managers before making any decisions on how to invest your cash reserves.

Green Ridge Wealth Planning is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.