Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 12, 1995 TAG: 9506130025
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
But cash - or cash equivalents - takes on a different meaning when it comes to your investment portfolio. Moving "into cash" is a defensive strategy when other markets overheat, and one Roanoke money manager believes this is an appropriate time for at least a partial shift.
Cash equivalents are short-term, interest-earning instruments or investments with high liquidity - that is, easily and quickly converted to cash - and high safety. That is, according to the Institute of Certified Financial Planners, they are as good as cash.
Some examples are money market mutual funds, Treasury bills, bank certificates of deposit and short-term bond funds. Generally, they earn more than a bank checking or passbook savings account with not much more risk.
The financial planners say cash equivalents serve two basic purposes:
They are places to store emergency funds intended to help meet living expenses in case of a sudden drop in income or to pay for large, unexpected expenses such as a medical or legal bill.
They are a parking place for investment money until you're ready to put it into other assets such as stocks, bonds, real estate or long-term bonds.
The planners point out that cash equivalents themselves might be good investments if short-term rates are high, but historically, most short-term investments barely keep ahead of inflation.
J. Gregory Tinaglia of Investment Management Corp. in Roanoke, advises having a predetermined objective for your investment portfolio. You have to think about what your objectives are regarding rate of return and your comfort with volatility of the three major categories of investments: stocks, bonds and cash equivalents.
Tinaglia divides portfolios into four categories. Starting with the most risky, they are aggressive growth, conservative growth, balanced growth and maximum income.
Selecting a category depends a lot on an investor's age and life situation. And, he said, investors should have a long investment horizon of at least five years or, better yet, 10 years for the riskier portfolios.
When the markets are favorable, Tinaglia recommends very little investment in cash equivalents, outside of the emergency funds. Even the most conservative of the portfolios would contain only 15 percent in cash equivalents.
"A lot of people tend to have more cash," Tinaglia said. But he pointed out that the average cash investment earns a 3.6 percent return, only a half-point above the historical inflation rate of 3.1 percent. And that's before taxes. Bonds, meanwhile, have averaged a 5 percent return, while stocks over the years have grown at 10 percent annually.
His aggressive-growth portfolio would be invested fully in stocks. This is for people younger than 50 who are willing to accept short-term declines with a goal of capital growth.
Even though he believes the market is unfavorable now, Tinaglia said aggressive-growth investors should remain fully committed to stocks and ride out a downturn.
A conservative-growth portfolio is for investors up to age 60 who will accept moderate declines for moderate capital growth.
Ordinarily such investors would own 70 percent stocks and 30 percent bonds, but Tinaglia would make a change in today's market. He would get out of bonds completely, investing 50 percent in cash and the other half in stocks. Right now, he explained, the return on cash is about the same as on bonds but with a lower risk.
Even if the investor did not want to get out of the existing securities, this is how he would at least allocate new savings.
Balanced-growth investors usually would own 45 percent each in stocks and bonds and 10 percent in cash. This portfolio is for people between the ages of 50 and 60 who are making the transition to retirement. They would accept moderate, short-term declines in return for moderate growth and income.
Today, however, Tinaglia is recommending 60 percent cash and 40 percent in stocks for the balanced-growth portfolio.
The maximum-income portfolio for those over 60 aims at current income for retirement. Generally, it is invested 65 percent in bonds, 20 percent in stocks and 15 percent cash.
In this market climate, Tinaglia would have retirees put 60 percent of their money in cash, 25 percent in income-producing bonds and 15 percent in stocks.
The risk levels are high because the stock market is so high, Tinaglia said. Most people of any age ordinarily have too much invested in cash equivalents, he said, but now is the time to take shelter there.
The Institute of Certified Financial Planners offered some tips about the various cash equivalents.
nMoney market mutual funds at brokerages and banks are not federally guaranteed against loss of principal, but their risk is low because of their diversification, strict regulation and investment in high quality, short-term debt. Some invest in high-quality commercial debt along with some government securities, while others specialize in tax-exempt municipal bonds.
Money market accounts, offered by banks, are federally insured up to $100,000. They often require higher investment and have more withdrawal restrictions than the money market mutual funds do, and their interest rates tend to be a bit lower.
Treasury bills, issued with three- or six-month maturities, are federally guaranteed securities exempt from state income taxes. They carry some risk if you sell them prior to the maturity date in a rising interest rate market. The biggest problem for smaller investors is that the minimum denomination is $10,000. They are sold by brokers for a fee of about $50, or they come without charge from Federal Reserve banks.
Certificates of deposit are federally guaranteed. Three- to six-month CDs generally are considered the equivalent of cash, although you lose a portion of your interest earnings if you cash them in early. You can alleviate this problem by staggering maturity dates so that some CDs are always coming due.
Short-term bond funds are not considered cash equivalents by all financial advisers. They also are riskier than other cash investments, although they provide a higher return. To be a good cash equivalent, the bond fund should invest in bonds with average maturities of no more than three months to one year.
by CNB