Where do you keep your cash?

[KevinW]

MMFs, sweep or not, are the worst of both worlds, I believe. See this article:
http://www.learnbonds.com/money-market- ... get-worse/

Pure T-bill MMFs do not have this problem, since T-bills are by construction safer than FDIC insurance. T-bill funds are the only kind of cash account that operate on a 100% reserve basis (or very close) and are hence immune to runs. This is discussed at some length in "Inflation Proofing Your Investments." It is why I aim to use T-bill MMFs and am using MMFs with as high a T-bill content as possible in the mean time.

[clacy]

I am not going to keep 25% of my portfolio in an asset class that the Fed has said they will suppress through at least 2014.

That is the Fed's purpose. Push people out of cash into more risky investments.

Correct.  And they've been nice enough to essentially announce that strategy and give their time frame. 

Fortunately these total return funds basically go straight up with very low volatility.  They are definitely chasing yield by investing into junk, muni's, MBS, etc.  I think a rising rate environment will be the thing that hurts these funds, but that shouldn't be that hard to foresee, IMO.

[notsheigetz]

That is the Fed's purpose. Push people out of cash into more risky investments.

I've recently converted all of my SHY into T-Bills so that's where about 90% of my cash is right now. Now that I know the Fed is trying to push me into more risky investments I feel even better about it. Take that Fed, I'm buying your goddamn T-Bills whether you like it or not.

[dualstow]

(never mind)

[MachineGhost]

Some banks are starting to offer 6-10 year CD's now, but that is a disaster waiting to happen.  Going past 5-years of maturity will get you very little additional increase in yield, but orders of a magnitude more exposure to inflation-induced principal losses.  It may not be so obvious holding in the primary market, but on the secondary auction markets at Schwab, etc. you will see it.

[MachineGhost]

I was rereading bits of Best Laid Plans last night. Browne writes about why the FDIC is not good enough for him and his reasons make sense to me. At the same time, I have no doubt that there are members here who preach treasurys  and quietly invest in CDs. I get that, too. It seems like even in the event of a real calamity, CD holders might have to wait longer to get all their money. In the bogleheads forum, nisiprius has written about how a bank failure was basically a nonevent for him. The bank got a new name and his CDs were still honored.

In fairness, Browne had no direct experience with FDIC since the last time we had a spate of bank failures was in the Great Depression and he died before the subprime bubble popped with massive bank failures.  Say what you will about the morons in Congress, but the FDIC understands what a banking panic truly is and they get the job done efficiently and quietly.  If the FDIC had authority over the investment banks back in 2007-2008, it would have been a non-event instead of the bungeling morass we're in now.

I'm not sure what role the FDIC played in the savings and loan fiasco in the late '80s, but a separate entity was setup by Congress (RTC) to receive and liquidate the failures.

[MachineGhost]

In contrast, the Treasury is constitutionally obligated (by the 14th amendment) to pay off t-bills and t-bonds (and i-bonds and ee-bonds).  If push comes to shove, for example Congress refuses to raise the debt limit, I suspect the Treasury would pay off US debt before paying virtually anything else (like, say, Congressional salaries, or even Social Security payments).

Due to the debt ceiling crises, it was made clear by Congress that transfer payments were to be prioritized over everything else, including the debt.  If sore history is any guide, the debt holders (especially foreigners) get whacked first before the common populace.

When opening brokerage accounts, I always opt for FDIC-insured cash sweep option.  Breaking the buck is very common; like mutual fund failures, its just assumed over by the parent company so you don't see it, hear it or taste it.  But in a true crisis, its a risky proposition to be in.

[AgAuMoney]

I'm not sure what role the FDIC played in the savings and loan fiasco in the late '80s, but a separate entity was setup by Congress (RTC) to receive and liquidate the failures.

My impression is "not much if any."  The FDIC didn't enter the picture until later.

The S&L's were insured by their own entity, FSLIC, just like credit unions still are. It went bust and was bailed out a couple of times, while trying to cover less than 1/2 the failures (less than 1/4 of S&Ls failed but that was still a large number in a short time).  The FDIC assumed all future S&L insurance and the RTC was set up to handle the failures.

Everyone's amounts up to the insured limit were recreated (typically as a balance in some other institution but sometimes as a check in the mail) fairly soon and those over the insured limit were eventually also paid out as I remember it.

The ultimate payer for the S&L fiasco ended up being the taxpayer.  Just like 2008.  The incentives have been distorted to be harmful.  "They" choose the risk, reap the reward if any or shuffle off the failures to someone else.

The FDIC and NCUA create a moral hazard (as did the FSLIC in its day).  The cost, risk and reward are not evenly distributed.  In more physical terms, they form an attractive nuisance.

[rickb]

Due to the debt ceiling crises, it was made clear by Congress that transfer payments were to be prioritized over everything else, including the debt.  If sore history is any guide, the debt holders (especially foreigners) get whacked first before the common populace.

I've looked for this and all I can find are things saying government debt would be paid first, and that Treasury (not Congress) would decide what gets paid next (and that it would be incredibly messy, if not impossible, to prioritize spending since nearly everything happens automatically and there are something like 5 million transactions per day).

The basic point is that it would be far easier for the government to fail to back FDIC obligations than to fail to pay off US debt.  I'm not saying it would be popular, but the possibility that (due to extraordinary circumstances) the FDIC pays only 50% (or 20% or whatever the number might be) to holders of assets in FDIC-backed banks is FAR more likely than the government failing to pay t-bills or t-bonds in full.

[Ad Orientem]

But my back was killing me so I switched to SHV.

[goodasgold]

But my back was killing me so I switched to SHV.

Good one, Ad Orientum!

Reminds me of what reputedly happened on occasion during World War II, when a U.S. Navy ship would drop anchor at a new island in the South Pacific. Some unscrupulous sailors would go on a spree, buying everything in sight and paying their bills with Monopoly money, assuring the local people that they could exchange the Monopoly money for U.S. dollars at the nearest U.S. consulate.

Needlesss to say, when the local people paddled their canoes to the nearest consulate and were disappointed in their foreign exchange endeavor, U.S. Navy personnel were not exactly regarded as global goodwill ambassadors. (I hope the cheated local people eventually got their money back, but it is unlikely.)

[sophie]

Thanks for the response. Please do let us know if you learn of any specific differences.

OK, finally called.  The sweep account is covered by SIPC insurance, which is $250,000 for cash and $500,000 total.  (Just realized I forgot to ask if this is per account or for all your accounts in aggregate).  Beyond $500,000, Fidelity has a policy with Lloyd's of London.  They don't have any FDIC core options.

The available cash options are all about the same:  <10% treasuries, and most of the rest are repurchase agreements.  You can get a tax free municipal fund in taxable accounts, if you're so inclined.  Alas, FDLXX is not a sweep account option, despite a tantalizing hint on their website that it might be.  It's genuinely 100% treasuries, but the minimum balance is $25K.

[blackomen]

I buy UUP (dollar index) with my cash portion when it's oversold and unload it when it's overbought..