Where to hold cash.

[Laxputs]

I have 30% of my portfolio in cash. 70% of that USD 30% CDN.  Where is the best place to keep cash; high liquidity, highest yield, lowest downside if the market crashes?  I know nothing about bonds or preferred stock or what have you.. I was using SHV before.  Bank accounts and brokerage accounts often only cover cash up to 100k so cash itself comes with risks as well.

 

TIA.

[matjone]

What's wrong with treasuries?

[Laxputs]

Open to any ideas. I know nothing about fixed income, treasuries, you name it.

[LC]

BRK?  ;D

[thepupil]

If you are a US citizen, I'd recommend i bonds. They are restricted cash (can't redeem for the first year), and in years 1-5 you pay a small penalty for redemption (one quarter's interest).

 

They are the best fixed income investment in the world as they currently return the nominal rate of the Barclay's index with 1 yr duration and inflation protection, no credit risk and slightly better tax treatment (ordinary income, but not until you sell). So they offer tremendous relative value. You can buy $10K / year per SS number.

 

If your cash savings needs exceed $10K/ year (20K for couples), then the next best option is a Synchrony (old GE) 5 yr CD which pays 2.25% and carries a penalty of 3/4 interest for early redemption (1.7%). Once again, this is a low duration, no credit risk (unless you consider FDIC a credit risk) investment that returns the same as the barclay's aggregate index with much lower risk.

 

You can buy $250K. I'm sure there are other banks with similar deals so if you need more than that, just go find those banks.

 

http://ibd.morningstar.com/article/article.asp?id=650538&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14;frmtId=12,%20brf295

 

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

 

the combination of i bonds and CD's creates a better bond index for the small time individual investor.

[Laxputs]

I'll spend some time on those. Anything with no penalties for withdrawals under 1 year you'd recommend?

[thepupil]

Amex and GE High Yield Savings Accounts, 85-95 bps for FDIC insured money available immediately.

 

https://www.myoptimizerplus.com/banking/products/high-yield-saving/index.htm?UISCode=0000000

 

https://personalsavings.americanexpress.com/index.html

[Laxputs]

Should mention I'm Canadian...

[yadayada]

Im with Hellenic bank, and I could get 6 month fixed rate at 3.25% I think. Cannot touch it for 6 months.

[frugalchief]

 

If your cash savings needs exceed $10K/ year (20K for couples), then the next best option is a Synchrony (old GE) 5 yr CD which pays 2.25% and carries a penalty of 3/4 interest for early redemption (1.7%). Once again, this is a low duration, no credit risk (unless you consider FDIC a credit risk) investment that returns the same as the barclay's aggregate index with much lower risk.

 

BRK?  ;D

 

I keep our emergency fund cash (6 months of income) in a money market.  Anything over that, I will be putting into BRK.

 

WEB's #1 rule is to never lose money...and I trust his, Mungers, Todd, & Ted's commitment to that.  I view BRK more risk-free than US gov. securities.  This is of course with funds that I would hope to hold there for at least 6mths - 1 yr at a minimum.

 

Also, just saw this about BRK cash hoard.....http://www.thenational.ae/business/markets/warren-buffetts-55bn-cash-hoard-bucks-trend

 

 

[merkhet]

I think LC is referencing something NOT to do, actually.

 

Pre-2008, Mohnish Pabrai had allocated money to BRK in the belief that, in a crisis situation, Berkshire was basically "good as cash," but that was subsequently proved incorrect.

 

Just to clarify -- if you're investing in BRK to invest in BRK, that's great. But if you're investing in BRK because you think it might be "cash-like" in a crisis, you might want to reconsider.

[Laxputs]

I mean, I'm looking to keep that cash in something I can take out tomorrow. BRK will fall in a market sell-off event. I'm holding the cash for the option of buying things at reduced prices and having the ability to move very quickly. So something that locks me up for a month or a stock that will still fall with the market won't work. But I dunno, SHV or T-Bills or money market funds I'll look into. I just know nothing about what options fit my description (for Canadians holding USD and CDN $).

 

Thanks so far for the replies.

[SharperDingaan]

Most would hold longer term Province of Ontario Bonds in a margin account, & margin against the bond as/when cash is required. Interest is paid only on what you need, when you need it, while the loan is outstanding - & is fully deductible. Unlike a GIC, there is no need to redeem the whole bond - just because you temporarily need a few bucks for a short period.

 

Given you have so much uncertainty over timing, & can make no decisions on holding periods until you actually get there - a 1yr term should be high on your list. Rushing into a full, & potentially a trading position, is seldom a smart thing - & the margin requirement will ensure that you at least retain some powder until maturity.

 

SD

[frugalchief]

 

Pre-2008, Mohnish Pabrai had allocated money to BRK in the belief that, in a crisis situation, Berkshire was basically "good as cash," but that was subsequently proved incorrect.

 

Just to clarify -- if you're investing in BRK to invest in BRK, that's great. But if you're investing in BRK because you think it might be "cash-like" in a crisis, you might want to reconsider.

 

I do remember that about Pabrai, which was unfortunate.  I don't view BRK as 100% "good-as-cash," b/c it certainly has downside should the market tank like 2008.  I wouldn't put all my cash in BRK as a "cash holding," but would put a % in it if I don't have any good ideas.  I would view it more as "restricted cash" until I found a good place to park it.  But, it would probably lead to permanent holdings anyhow.... ;D

[LC]

I think LC is referencing something NOT to do, actually.

 

Pre-2008, Mohnish Pabrai had allocated money to BRK in the belief that, in a crisis situation, Berkshire was basically "good as cash," but that was subsequently proved incorrect.

 

Just to clarify -- if you're investing in BRK to invest in BRK, that's great. But if you're investing in BRK because you think it might be "cash-like" in a crisis, you might want to reconsider.

 

That's pretty much what I was trying to get at, with all the subtext of a :D symbol!

 

If you're looking reduce the carrying costs of dry powder so you can pick up bargains, you have to realize what the situation that causes these bargains to exist will do to your dry powder.

 

If you're looking to put excess funds somewhere because you have no better ideas and as racemize says, optimally a zero cash balance is probably the best option, maybe BRK is an option.

 

You have to really define what you're trying to do because essentially it's a hedge and you have to know what you're hedging against and how your hedge will react.

[giofranchi]

I was using SHV before. 

 

I hold my whole cash reserve in SHV, and I am perfectly fine with that. ;)

 

Gio

[stahleyp]

I was using SHV before. 

 

I hold my whole cash reserve in SHV, and I am perfectly fine with that. ;)

 

Gio

 

Why don't you just buy an actual short term treasury? After fee for the etf, you have almost no return.

[giofranchi]

Why don't you just buy an actual short term treasury? After fee for the etf, you have almost no return.

 

Some reasons:

 

1) I don’t know how to choose among short term treasuries.

 

2) I don’t even know if I could actually buy a short term treasury through my bank in Italy…

 

3) Most of all, imo cash is cash… and I don’t require it to yield anything. There are some businesses I like. When I have some cash and their prices are right, I buy them. Otherwise, I keep the cash, waiting for a good price. This is all I do, and usually it works just fine. At least, it has worked fine until now… The main risk of holding cash as a strategic asset that I see is a “currency risk”: all the businesses I like have assets denominated in USD (or CND). Keeping cash in SHV, I eliminate altogether that risk. Let’s suppose a market correction comes, which is accompanied by the EUR losing 30% against the USD… If I held cash in EUR, practically all my increase in purchasing power, given the bargain prices in a market correction, would be eliminated by a weaker currency… If, instead, opportunities like the BH or the Liberty rights offering, or the recent volatility in BH and ALS share prices, come my way, I am able to quickly sell SHV and buy those businesses that I like at good prices.

 

Gio

 

[stahleyp]

I'd be careful about the certainty of SHV though, gio. It may invest in treasuries but it is not as safe as they are. If we go through a serious time of market distress you might see a discount on the etf. I don't think it would be too severe or anything but just something to keep in mind.

 

You should probably call your bank and ask. At the end of the day you are taking on a tad more risk and getting a lower return.

 

[giofranchi]

I'd be careful about the certainty of SHV though, gio. It may invest in treasuries but it is not as safe as they are. If we go through a serious time of market distress you might see a discount on the etf. I don't think it would be too severe or anything but just something to keep in mind.

 

You should probably call your bank and ask. At the end of the day you are taking on a tad more risk and getting a lower return.

 

Maybe… On the other hand, last time we had a crisis, from August 2007 until March 2009, SHV actually appreciated from $109.9 to $110.3… Usually, treasuries are seen as a “safe heaven” in a crisis, and I don’t see why SHV should behave differently…

 

Of course there might be some interest rates risk, if the economy continues to improve and any deflation scare is finally put to rest… But with an effective duration of only 0.39 years also that risk is as low as can be.

 

Anyway, I will surely ask my broker! ;)

 

Thank you,

 

Gio

 

[benhacker]

Gio,

 

Maybe… On the other hand, last time we had a crisis, from August 2007 until March 2009, SHV actually appreciated from $109.9 to $110.3… Usually, treasuries are seen as a “safe heaven” in a crisis, and I don’t see why SHV should behave differently…

 

Of course there might be some interest rates risk, if the economy continues to improve and any deflation scare is finally put to rest… But with an effective duration of only 0.39 years also that risk is as low as can be.

 

I think you are missing Paul's point.  The underlying treasuries price movement isn't his point (that they went up in '07 - '09, or do carry some small interest rate risk)... we agree on all that.

 

What Paul (I think) is highlighting is a real (albeit very small) risk of the SHV shares detaching from the NAV of the underlying treasuries it holds.  This is rare as their is an arbitrage mechanism that should keep them tightly coupled.

 

However, there is a pretty famous example of this issue happening, I believe is happened on AGG (a very large and major US aggregate bond index ETF) the day of (or day after) Lehman filed... the fund traded briefly at a 10% discount to it's underlying (vs. a tight coupling usually +/- 0.25%).  This occurred due to several factors, one of which was illiquidity of the underlying holdings (uncertainty of what NAV really was) which probably shouldn't ever apply to SHV, but another one was just the typical funds / bots / market makers who arb ETFs simply shut off their algorithms and risk taking during this time and it took a bit before the void was filled.

 

I think the risk of SHV is de minimis, but I agree with Paul that direct T-bill buying is probably preferable if you have any significant $$$ at all.

 

My 2 cents.

[Laxputs]

So as far as greatest safety with immediate liquidity with highest yield the list is:

 

1. Treasuries

2. SHV

3. Insured bank/brokerage account

 

Royal Bank's Direct Investing has RBF2020 that offer 1.25%/year and are insured but have to look more into them.

[EliG]

Should mention I'm Canadian...

 

http://www.highinterestsavings.ca/chart/

 

I use Peoples Trust for my non-registered cash. 1.80% at the moment. Canadian Direct Financial is 1.90% but I'm too lazy to open another account.

[giofranchi]

I think you are missing Paul's point.  The underlying treasuries price movement isn't his point (that they went up in '07 - '09, or do carry some small interest rate risk)... we agree on all that.

 

Hi Ben,

I haven’t said short term treasuries went up from August 2007 to March 2009… I have said SHV went up!

 

I think I have understood what Paul said, but is there evidence SHV has ever detached from the underlying treasuries? In other words, do you think the treasury notes SHV was invested in from August 2007 to March 2009 might have gone up more than the amount SHV appreciated?

 

Moreover, looking at SHV share price during the last 6 years, I don’t see any sudden and unexpected volatility… therefore, it doesn’t seem like SHV has ever detached from the underlying treasuries even for a short period of time.

 

Of course, I cannot be sure… therefore, please correct me, if I am wrong!

 

Thank you,

 

Gio

 

[stahleyp]

I think you are missing Paul's point.  The underlying treasuries price movement isn't his point (that they went up in '07 - '09, or do carry some small interest rate risk)... we agree on all that.

 

Hi Ben,

I haven’t said short term treasuries went up from August 2007 to March 2009… I have said SHV went up!

 

I think I have understood what Paul said, but is there evidence SHV has ever detached from the underlying treasuries? In other words, do you think the treasury notes SHV was invested in from August 2007 to March 2009 might have gone up more than the amount SHV appreciated?

 

Moreover, looking at SHV share price during the last 6 years, I don’t see any sudden and unexpected volatility… therefore, it doesn’t seem like SHV has ever detached from the underlying treasuries even for a short period of time.

 

Of course, I cannot be sure… therefore, please correct me, if I am wrong!

 

Thank you,

 

Gio

 

ben's explanation is accurate.

 

At the end of the day, gio, you're probably right. It shouldn't divulge much from actual treasuries. However, it is not a treasury and from time to time things can be incredibly irrational. Look at the muni reset market in 2008. These things were marketed as short term cash alternatives...and you couldn't get out of them! Now, do I think that's the case with the ETF? No.

 

I just don't see the benefit of buying an ETF with an expense ratio that destroys almost any yield (and have the risk of something happening to create a discount from NAV) when one can simply buy treasuries (this makes even better if you can buy treasures with no commission) and get a higher return. Just looking out for ya man!