Types of Investments: Cash

Cash and cash equivalents

In daily life, cash is all around you, as currency, bank balances, negotiable money orders, and checks. However, in investing, "cash" is also used to refer to so-called cash equivalents: investments that are considered safe and can be converted to cash quickly. Common cash equivalents include savings accounts, money market deposit accounts, money market funds, certificates of deposit, guaranteed investment contracts (GICs), government savings bonds, U.S. Treasury bills, Eurodollar certificates of deposit, commercial paper, and face amount certificates.

The role of cash in your portfolio

Because of their conservative nature, cash equivalents involve the least risk. However, there is a tradeoff for their relative safety: Their potential return is not as high as investments that involve more risk. By focusing solely on playing it safe, you may limit your investment income, especially over longer time periods.

Cash investments can be useful in many ways. First, they can provide relative stability. While cash equivalents can't assure you of a gain or protect you from losses, they are generally considered safer than other asset classes, such as stocks or bonds. Also, they can provide income on cash that would otherwise be idle. They can serve as a ready source of cash to pay bills or make purchases. For example, cash equivalents can help preserve money earmarked for a down payment or a family vacation. Readily available cash also can help you cope in a financial emergency. Finally, cash equivalents can serve as a temporary parking place when you're not sure where to invest your money.

This is a publication of Forefield, Inc., which is not affiliated with WFG Investments, Inc.

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