Put cash to work in portfolio through T-bills, CDs

When you think about investments, the most common vehicles that come to mind are likely the classics – stocks, bonds and cash. Tailoring the right mix of these asset classes is important in meeting financial goals and managing the risk in your investment portfolio. Most general asset allocation guidelines suggest a small percentage of a portfolio should be kept in cash or cash alternatives.

Although cash is an important element of an overall investment mix, some investors may place too much emphasis on it, not bearing in mind that it is just one piece of the puzzle. For income-oriented investors, for example, an aversion to low long-term bond yields may mean that cash plays too prominent a role in their portfolios given their overall investment objectives.

Fortunately, several short-term investment alternatives offer opportunities to boost portfolio yield while maintaining risk characteristics that can help keep volatility relatively low and, at the same time, preserve flexibility to adjust as long-term rates improve.

Treasury bills

Among such alternatives, investors may want to consider investing in Treasury bills. Issued by the U.S. Treasury at a discounted price from their face value, T-bills mature in six months or less. An investment in a Treasury bill improves yield versus cash, and offers investors the opportunity to reinvest relatively quickly.

Because they are backed by the full faith and credit of the U.S. government, T-bills are among the most creditworthy instruments available to investors. Interest accrued on Treasury bills is exempt from state taxes but subject to federal income tax.

Certificates of deposit

Depending on your time horizon for investments, another option to consider investing in is a brokered certificate of deposit.

Similar to a bond, when you invest in a brokered CD, you are loaning money for a specific time period. Most CDs have maturities between three months and 10 years. During that period, you earn interest on your deposit, and the face value of the investment is returned to you at the end of the specified time.

The maturity date and interest rate are set when you purchase a CD. As a result, you can select the investment period that is most appropriate for your individual financial needs.

With current rates at or above 5 percent for CDs with maturity at 18 months or longer, it’s easy to see that CDs can provide significant yield compared to just letting excess cash sit idle.

While most investors intend to hold CDs until maturity, CDs can be sold – or in some cases, redeemed – prior to maturity. Like other fixed-income investments, the market value of a CD will vary depending on prevailing interest rate, the length of the CD’s maturity and other special CD features. In general, when interest rates rise, a CD’s value will decrease and vice versa.

Keep in mind that if a CD is sold prior to maturity, the owner may receive less than the original cost.

While Treasury bills and CDs are just a couple of examples of alternatives for the cash portion of your portfolio, it’s important to remember that each piece of your allocation has an important place within the overall investment mix.

Managing your asset allocation is vital to meeting long-term goals and managing risk. While maintaining an appropriate cash allocation helps to build in cushion and flexibility, being overweight in cash may result in unnecessary sacrifice of yield, so maintaining a proper balance is important.

Timothy M. Reese is senior vice president-investments with A.G. Edwards & Sons Inc. Member SIPC. He can be reached at timothy.reese@agedwards.com.