If you keep your money in cash reserves (usually in the form of a money market fund) in a brokerage account like Fidelity, you are likely to get a yield of over 5%. This has never happened before during my time as an investment advisor. For a long time, cash reserves were paying nothing. No wonder the saying “cash is trash” became a golden rule. But not anymore.

Even banks are offering CDs that have a yield of 5%. However, it’s important to note the difference between a CD and cash reserves. The CD is illiquid money that you can not use until it matures. Cash reserves, on the other hand, are completely liquid. You can withdraw your cash at any time. This is what makes it superior to CDs. 

Cash reserves with such high yields have also made some other asset classes less attractive. The obvious one is Real Estate Investment Trusts or REITs. Currently, REITs have a typical yield of less than 3%, and they have the potential to fall even further since many real estate companies have loans come due. They need to refinance but interest rates have gone up so much they can hardly afford the new loans. 

This is why I recently made a major portfolio decision for myself and my clients: to remove REIT as an asset class, and to add cash as an asset class. 

On top of attractive yields without any price risk, cash reserves also provide an important option value. If the stock market should fall, say 20%, then the cash can be deployed to acquire more shares at a deep discount. 

Get informed about wealth building, sign up for The Investment Scientist newsletter