How exactly does cash go up?

[dualstow]

Forgive the silly question. Most of the questions about cash amount to "why hold it?" I'm holding it. My question is simply, when cash goes up 6% in a year, { like here - scroll down to the year 2000 } what exactly is going on? I know that short term treasuries are acceptable, but Harry Browne recommended a treasury money market for the cash component, and it is from Harry's site that the link above comes.

When I think about cash, I think about the rise and fall of the value of the US dollar relative to gold and foreign currencies, but ...
a 6% gain: was this just a rise in the value of some short-term treasury fund?

[AdamA]

When I think about cash, I think about the rise and fall of the value of the US dollar relative to gold and foreign currencies, but ...
a 6% gain: was this just a rise in the value of some short-term treasury fund?

I think it's just the interest paid. 

[Lone Wolf]

Right, it is the interest that the cash earns sitting in Treasury bills.  It's hard to imagine that short-term rates were that high but I recall them being north of 6% around that time.

Rates were forced down fairly soon after that in response to the 2001 dot-com bust and recession.  They're currently extremely close to zero, meaning that cash earns very little at the moment.

[chrikenn]

Yeah, Vanguard's prime money market fund is a hilarious example of how "good" cash used to be.  Check out the performance figures:

Since 1975: 5.98% annualized!!

Last 10 years: 2.35% annualized

Last 5 years: 2.59% annualized

Last 3 years: 0.99% annualized

Last year: 0.06% annualized

Pretty amazing that the annualized returns over the last 30+ years are 5.98%.  And that now it's returning very close to ZERO!

[MediumTex]

In 1981 I think t-bill rates hit 17%

It's the only thing that kept the PP from having a terrible year.

[moda0306]

Yeah, yields are awful right now.  I know we're not supposed to yield chase, but it's fun and currently I like a combination of the Ally 5-year CD at 2.4% (60-day interest penalty... just keep it under $250k (NOT a problem for me)) for your emergency fund, and i-bonds for the rest.  

Yes, Ibonds, even at their 0% base rate... they're very liberal with their inflation figure IMO (must include food/fuel).  It'd be nice to have a little fixed juice... though it can go right back to zero with a negative inflation portion, so I'm not too hung up on that as long as the inflation portion keeps up with ST rates.  Better than the .28 and 1.32% that 1 & 3 year treasuries are earning today, respectively.  

[AdamA]

In 1981 I think t-bill rates hit 17%

It's the only thing that kept the PP from having a terrible year.

Could happen again if the Fed stops manipulating the low end of the yield curve.  

[moda0306]

Adam,

I think the fed actually purposefully pushed it higher than it would have been back then... but even so, if the fed quit juicing the economy, I think we'd slide into a deflationary spiral and rates would stay low anyway (part of the interest rate mystery I haven't worked out in my head yet)... though I'm willing to bet lending to risky borrowers would continue to grab extremely high rates if default risk started coming back to the party.

[KevinW]

Also, during deflation dollars gain buying power.  In 2008, $1 spent on real estate, used cars, and fast food went a lot farther than it did in 2007.  Cash became more valuable even though its NAV stayed the same.

[dualstow]

Very interesting replies, thank you!
Yeah, I don't expect to get much out of my treasury money market fund in the way of interest, but at least it's stable.

[AdamA]

... but even so, if the fed quit juicing the economy, I think we'd slide into a deflationary spiral and rates would stay low anyway (part of the interest rate mystery I haven't worked out in my head yet)...

Ultimately, I agree, but I think that so much of our debt at present is financed at the short end of the curve that if the Fed took it's finger off of the print button, short term rates would rise a bit before they would fall (ie, it would be the natural rise in rates that would push us into a recession/deflationary period). 

Almost certainly they wouldn't get near 17%, though.

[LifestyleFreedom]

I keep many months of living expenses (and my insurance deductibles) split between my checking account and a separate high-yield savings account.  I don't consider this cash to be part of my investment portfolio, but rather as an emergency cash reserve.

If I have to go for months without income because I can't find a gig (I work as a freelancer on a contract basis), then I draw on my cash reserve to make it through the rough patch.  It also means I don't have to "dip into investments" to pay living expenses if I find myself out of work.

What I've found useful about having cash on hand is not only for collection of dividends and interest, but also as a capital reserve to take advantage of opportunities that might come up unexpectedly.  When the financial crisis hit in late 2008, for example, the value of the equities in my Traditional IRA dropped 50 percent.  I then converted this to a Roth IRA and used my cash to pay the income taxes on the conversion, which means I only paid half the taxes I would have had to pay had the financial crisis not occurred.  Since then, the equities in my Roth IRA have recovered about 80 percent of their drop and are approaching the values they had before the crisis occurred.

Whether these equities continue to appreciate or we have another "major pullback" remains to be seen.  But my Roth IRA is for long-term use.  If the portfolio bounces around in value over the next several years, I'm not going to be concerned because I won't be needing the IRA money for well into the future.