Is Cash Still King?

Jim Cramer mentioned something recently on his CNBC show, Mad Money, that should have resonated with investors and savers. “Cash is no longer king.”

What Does He Mean?

Let’s clarify that Cramer is not talking about the money you keep in your pocket. Cash for some time has been king because fixed-income investments have offered great returns for the past few years when interest rates were higher. These investments have offered investors great returns on their money and a safe place to stash your cash. For the conservative investor, money market savings accounts, CDs, and municipal bonds have been a low-risk way to beat inflation and make a decent return on your investment.

So Why is Cash No Longer King?

The Federal Reserve will continue to cut rates all the way to 0%. Federal Reserve Chairman, Ben Bernanke, stated that the Fed is “alert and flexible” as the weakening condition in the financial markets may have a broader affect on the economy. This is coming off the heels of No. 2 official, Donald Kohn, who stated the day before that the central bank must remain “nimble.”

Is cash really no longer cream of the crop? Well, yes. We’ve already seen interest rates on CDs and high-yield savings accounts plummet, and as things potentially worsen, the Fed will likely continue to cut short-term interest rates. This will make cash investments less valuable and over the next year short-term rates will continue to come down, and the returns on these fixed-income investments will also continue to come down. As these Fed rates continue to come closer and closer to 0%, your cash investment will no longer be able to keep up with the rate of inflation.

Now What Do We Do?

If Cramer is right, you should get out of your cash investments now and start moving it into other investments that will give you more bang for your buck. If you have a CD, do not to renew it when your investment matures. Often this happens automatically unless you request to cancel the investment. Just remember not to withdraw your CD early, otherwise you will incur early withdraw penalties.
Now Where Do We Go?

With the recent turmoil in the stock market, there are excellent buying opportunities in the stock market. The financial sector has experienced huge declines, may be oversold, and offer great dividends, but really you can look anywhere. Take a close look at Bank of America, Citigroup, and Freddie Mac for example, but there are opportunities throughout the market in all sectors and industries.

Considering we are entering a pre-election year, which makes it historically the best time ever to be in the stock market, I think Cramer is on to something. With the recent panic there is a lot of money waiting to be infused into the market that investors will need to put somewhere. And now that fixed-income investments are not paying back those huge returns, and with stocks looking cheap, money should return to the market and drive prices back up. Get in that action before it’s too late.

Source by Ryan

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