Want higher yields on cash investments, but don’t want to lose your principal?
Given today’s low-rate environment, you might assume that you can’t increase the income from your cash investments without jeopardizing your principal. With the proper planning, however, you can enjoy enhanced yields without assuming worrisome investment risks. Your Merrill Lynch financial advisor can develop a cash investment strategy that reflects the purpose of the cash—a down payment on a home or pending tuition payments, for example—as well as your risk tolerance and return goals.
While each investor’s liquidity strategy is unique to that investor, two core principles underlie every cash investment strategy:
Invest with purposePut simply, your cash investment strategy should be aligned with the purpose of the cash you’re investing. If you are saving to purchase a home in three years, for example, your investment choices should reflect your three-year time horizon. To continue with this example, you might create a portfolio of bonds maturing in three years. If you hold the bonds until maturity, you lower the risk of principal loss because you would receive your initial investment on the maturity dates. The matured value of the bond will be the same amount as your initial investment, assuming the bond was not purchased at a premium or a discount. It’s important to note that selling a bond before its maturity means you may not receive your initial investment. At the same time, you could receive higher yields than those available from bank deposits, money market funds, or bonds with shorter maturities.
Diversify your cash investmentsSome investors can achieve their short-term investment goals with a single investment vehicle, such as a savings account or money market fund. If you need cash to meet several different goals, however, you should consider developing a portfolio of cash investments with diverse risk profiles and return potential. Say you want to develop an emergency fund to meet expenses if you lose your job. Because you could need the cash at any time, principal stability and ready access to the cash is essential; given the purpose of the cash, a deposit account or money market fund would be a smart choice. For longer-term needs, such as funding your teenager’s college tuition, you might opt for a short-term bond fund because your longer-time horizon would allow you to assume somewhat higher risk to achieve a higher yield. Additional investments with varying risk/return characteristics can be incorporated to address different needs for cash.
Whatever your cash needs, a Merrill Lynch adviser can help you structure a cash investment program that is perfectly aligned with your risk tolerance, time horizon and liquidity needs. Drawing from investments ranging from bank deposit accounts to money market funds to short-term bond funds, we can develop a liquidity management strategy that can meet your short-term investment goals by maintaining the optimal tension between principal stability, liquidity and yield.
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Important Note on Bond Funds: Return of principal is not guaranteed. Bond funds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds owned by the fund. Generally, the value of bond funds rises when prevailing interest rates fall and falls when interest rates rise. There are ongoing fees and expenses associated with owning shares of bond funds.