It's better than stuffing money in the mattress.
Offering yields not seen in years, savings accounts, certificates of deposits and money market funds are enticing investors rattled by the recent gyrations in stocks and bonds.
Most of these cash investments are yielding about 5 percent after the Federal Reserve raised its target on short-term interest rates to 5.25 percent last month, its 17th consecutive increase since June 2004.
Investors big and small alike have been pouring more money into safe, liquid cash proxies.
For example, U.S. money market funds totaled $1.7 trillion in assets in the week ended July 4, up $126 billion from the beginning of the year, according to iMoneyNet, a financial data firm based in Westborough, Massachusetts.
Cash is the shining star of 2006. Rising interest rates have led to a lot of stock volatility and weighed down on bond returns, said Greg McBride, senior financial analyst at Bankrate.com, a financial services data provider based in North Palm Beach, Florida.
Major U.S. equities, as reflected in the Standard & Poor's 500 stock index, are up 1.94 percent so far in 2006, having recently clawed back into the black after briefly rescinding all the year's gains during the global market turbulence that took root in May. Meanwhile, the U.S. bond market, as measured by Lehman Brothers' Aggregate index, has lost 0.72 percent.
Compare that with the average 4.55 percent yield that taxable money market funds are offering, up from 3.61 percent at the start of 2006, according to iMoneynet.
It does concern us that relative returns will be hard to achieve. It's been hard to eke out those excess returns, said Angelo Manioudakis, head of high-grade bond investment at OppenheimerFunds Inc. in Boston.
TAKE THE SAFE ROUTE
Some money managers, including those running hedge funds, have sought to beat the market by taking riskier bets in emerging market bonds and oil, gold and other commodities.
Individual investors, however, should consider putting more money into savings, CDs, money market funds and other cash equivalent vehicles to ride out the current period of volatility, analysts and fund managers said.
The other choices are on shaky grounds. Psychologically, we've come back to acceptable levels in terms of yields, said Connie Bugbee, managing editor at iMoneyNet.
Yields on cash investments will continue climbing until the Fed signals it is finished raising rates because it feels inflation is under control, analysts say.
Inflation could be much more of a problem down the road. said William Larkin, fixed-income portfolio manager at Cabot Money Management at Salem, Massachusetts. We don't know when the Fed will end. Maybe we do go to 6 percent. No one knows.
Recent outperformance notwithstanding, experts advise against parking everything in cash to avoid short-term market turmoil. Cash still lags stocks and bonds in the long run. Sitting on too much cash will spoil long-term investment goals for retirement, they say.
Individual investors should make any changes to their portfolios with longer-time horizons in mind, such as needing cash to pay for college tuition, analysts say.
Cash products like a money market fund is an important part of every person's portfolio. Their long-term role must fit that person's needs and risk tolerance, said David Glocke, a senior portfolio manager who runs the $66 billion Vanguard Prime Money Market Fund.
While money market yields have risen as the Fed has ratcheted up rates over the past two years, they will fall when the central bank starts lowering rates. Stocks and bonds usually outperform cash investments when the Fed eases monetary policy.
But putting all your money in a money market fund doesn't make a good long-term investment relative to the long-term performance of stocks and bonds, Glocke said. Money markets have very attractive yields right now, but they have a lot of income risk.
Only two years ago, money market funds and savings accounts were yielding less than 1 percent, trailing badly behind stocks and bonds, Glocke said. Glocke's fund closed Tuesday with a yield of 4.98 percent after having begun 2006 with a 4.02 percent yield, according to Reuters data.
Right now with cash, you're getting a better bang for you buck, said Cabot's Larkin.