I never prescribe one overall asset-allocation formula because no such solution suits everyone. That includes the popular 60-40 stocks-to-bonds ratio, which advisers frequently recommend to retirees or preretirees who are afraid to lose principal but still need growth alongside immediate income. I also avoid dictating how much cash to hold, unless your answer is 100% — especially if you limit yourself to money market funds, Treasury bills and bank deposits.
However, there is another, often overlooked cash-management opportunity you can employ after you decide what percentage of your portfolio to keep in ready money: how best to distribute savings in interest-earning investments.
I take an expansive view of what counts as cash, with ultra-low duration (a measure of the price sensitivity of a fund or bond to changes in interest rates) high on my list. (Bond prices and interest rates move in opposite directions.) The goal is to collect substantial income with mild price risk and everyday liquidity. Consider the following ideas reasonable for most everyone:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Maximum yield
You can outdo the best money market and certificate of deposit rates by impersonating a banker: Invest in funds that hold high-yielding assets, such as commercial loans, credit card portfolios, home-equity credit lines, and so forth. Duration in these types of funds is minimal, and the payouts dwarf those of CDs and T-bills.
For example, Fidelity Floating Rate High Income Fund (FFRHX, yield 9.4%) and the discounted closed-end fund Nuveen Credit Strategies Income (JQC, distribution rate 13.0%) transmit enough income to offset even a small uptick in delinquencies and write-offs. RiverPark Floating Rate CMBS Fund (RCRFX, yield 7.7%) and Janus Henderson AAA CLO ETF (JAAA, yield 6.7%) focus on different kinds of creditors but boast similar duration, yield and return.
A better lockbox
If those ideas are too spicy, you can still add value. The yield curve is screaming for you to target three-to-six-month maturities; anything that goes out one to two years or longer is silly. If you have a one- or three-year CD coming due, or any 401(k) savings sitting in a stable-value account yielding 3%, consider transferring the cash to ultra-short options such as money market funds or T-bills.
On $50,000, the difference between a 3.0% and 5.5% yield is $1,250 a year — too much to ignore. And if you have cash in a brokerage account, be sure it sits in an actual money market fund and not a brokerage’s or bank’s holding tank paying no more than 1%.
High flexibility
If the economy weakens, or if the Federal Reserve hints that it can refrain from further interest rate hikes, the managers of actively managed ultra-short bond funds may be able to boost their net asset values a percentage point or two over and above the yield.
Funds such as T. Rowe Price Ultra Short-Term Bond Fund (TRBUX, yield 4.9%) did that in 2023 and it may pick up some upside on price until higher-yielding assets, which include corporate notes and consumer loans, roll over and new ones pay less. If you give the pros the flexibility to find snippets of extra yield on favorable terms, you should take home more cash with ease.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related Content
-
Heirs Inheriting Crypto? Don't Make It a Headache for ThemIf you have cryptocurrency in your estate, you'll need meticulous plans and clear instructions to ensure beneficiaries don't lose out after you're gone.
-
DIY Retirement Planning: A Smart Move or a Risky Endeavor?You can cut the cost of retirement planning by doing it yourself. But for something this important, it might be wiser to call in the professionals.
-
Should You Get a Home Warranty?A home warranty could lower your expenses for certain repairs, but you should weigh whether paying the premium is worth it.
-
The Outlook for Home and Auto Insurance in 2025Home and auto insurance premiums may not increase as much as in recent years, but the industry remains under pressure.
-
Financial Stocks Should Pay Off in 2025Looking to buy financial stocks? Businesses that provide financial products and services are buoyant, but you should be choosy about where to put your money.
-
Is 2025 the Year Workers Will Return to the Office?Managers want to cut back on remote work, but many employees value flexibility.
-
This T. Rowe Price Bond Fund Holds Up Well as Interest Rates ChangeWhile interest rates have come down, this T. Rowe Price floating-rate fund still sports an attractive yield.
-
2025 Stocks Forecast: What Stock Pros Expect This YearThe jury's out on the 2025 stocks forecast: will investors enjoy higher interest rates that dampen the market, or another year of double-digit returns?
-
Where to Go for a Post-Holiday Travel BreakNeed some post-holiday travel for a 2025 reset? These three destinations are guaranteed to relax and rejuvenate.
-
Should You Use Add-On CDs?Add-on CDs can be opened with as little as $100, offer a fixed interest rate and allow you to make deposits throughout the term. But what are the trade-offs?
