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Taking Profits? Where To Stash Your Cash

|Includes:SPDR Gold Trust ETF (GLD), SLV, TSLA

Let's say that you have owned Tesla (NASDAQ:TSLA) since the beginning of the year, have some hefty capital gains, and are concerned about a massive crash in the shares. Or perhaps you have successfully rode the bull market and are concerned about entering a seasonally challenging time of the year: the 9/11 anniversary is coming up and something about the month of October makes you shiver with memories of years past. Meanwhile, a seemingly dysfunctional Congress makes you wonder about its ability raise the debt ceiling without inducing a negative market event. So you sell. The question then is - where do you stash your cash?

The following table summarizes some readily available information with respect to fixed income alternatives. NOTE: rates may have changed somewhat since this article was submitted for publication.

Fixed Income Alternatives

 

 

3 Mo

6 Mo

9 Mo

1 Yr

2 Yr

3 Yr

5 Yr

10 Yr

20 Yr

30 Yr+

CDs

0.10

0.20

0.30

0.35

0.70

1.05

1.95

3.10

--

--

Bonds

                   

U.S. Treasuries

0.03

0.05

0.10

0.18

0.30

0.66

1.43

2.59

--

3.67

U.S. Treasury Zeros

--

--

--

0.08

0.34

0.61

1.39

2.82

3.72

3.88

Government Agencies

--

--

0.13

0.43

0.72

1.00

1.99

3.42

4.62

4.78

Corporates (AAA)

--

--

--

0.35

0.31

--

1.60

3.28

4.00

4.48

Corporates (NYSE:AA)

--

--

0.10

0.64

1.07

1.14

1.95

3.65

4.88

5.52

Corporates (NYSE:A)

--

0.27

0.37

0.83

1.23

1.44

2.43

4.34

4.92

5.52

Municipals (AAA)

--

--

--

--

0.60

--

1.90

3.15

3.81

5.20

Municipals

--

--

0.34

0.93

0.81

2.21

1.90

3.93

4.78

5.20

Municipals

--

--

0.34

0.93

2.14

2.46

2.57

5.00

6.29

6.24

CDs

CD yields can vary a bit depending on where you shop. A small local bank in my area has slightly higher CD yields than does the branch of a large nationwide bank. However, as can be seen by the chart, yields are abysmally low and a consumer today needs to go out 5 years just to get close to a 2% return. That said, an FDIC insured CD yielding 2% may be a better alternative than holding a dividend stock that yields 3% but dives 20% in a market correction.

Bonds

Bond yields appear to be in for a sea change. Indeed, the 10-year Treasury is already beginning to rise based on a number of factors - one being non-stop discussion of the Federal Reserve tapering its QE program. As a result, the yield on the 10-year has risen 40% since May to ~2.6%.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

While the price of the 10-year will obviously fall if yields rise further, perhaps some investors will think "Oh well, I'll just hold to maturity and take my safe (relatively...) 2.6%".

Corporate Bonds

Interestingly enough, yields on an average 10-year AAA rated corporate bond are only slightly higher than a 10-year CD. Of course you have the possibility for capital gains with a corporate bond, you also have the possibility of losses should rates rise.

Municipals Bonds

While municipal bonds offer slightly higher yields than other alternatives, and do provide tax-advantaged income, investors may worry that the Detroit bankruptcy may not be an isolated incident.

"Other"

Another option which I delved into years ago is an I-bond. A United States I-bond (inflation indexed bond) has a two component yield: a fixed rate and an inflation indexed rate. The total return of an I-bond is the sum of the two. Currently, the fixed rate is 0% and the inflation rate is 1.18%. The inflation rate is changed twice a year. I-bonds sold within 5 years will forfeit the latest 3 months earnings. Taxes are not paid on I-bonds until they are sold.

Currently, here are two negatives with I-bonds. One, the fixed rate is zero and two, you are dependent on the government to report a true inflation rate. A good time to have bought I-bonds was back in 2000, when the fixed rate was ~3.5%. You would be very happy today had you done so. There was also a time when you could purchase I-bonds on the internet using a credit card. Some people with cash-back credit cards got an automatic 1% yield on the purchase date. The government quickly discovered this gift and shut it down.

Gold & Silver

Those in the Ron Paul camp who believe that gold and silver are the only true currencies should be taking advantage of the current pullback in precious metal prices:

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

But of course gold and silver are not really "cash" investments - they are very volatile investments and not for the feint of heart. However, it should be noted that, despite the recent substantial correction in the price of gold, the gold ETF (NYSEARCA:GLD) has still outperformed the S&P500 over the past 10 years. So has the silver ETF (NYSEARCA:SLV).

GLD Chart

GLD data by YCharts

Under the Mattress

At the end of the day, you might not like any of the options above and simply decide to hold your cash, as, well "cash", until fixed income rates rise and make them worth your time and effort. In this case, I suggest you don't put the cash under your mattress. A better alternative is to do as Denzel Washington did in the move Flight: wrap your cash in some freezer paper, label it "pork chops" (or whatever), and store it on the bottom shelf of your freezer under a bunch of other frozen food.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article was obtained from company documents and/or sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck!

Stocks: GLD, SLV, TSLA