If you were smart, you took some or all of your money out of the stock market -- out of ETFs, indexes, emerging market mutuals, etc. -- and hunkered down into cash. We are in a recession and the sub-credit mess has seriously weakened the economy, and specifically the banks. But there is more bad news to come and we will have serious volatility and bear market conditions for many months to come. But cash may be a safer place to park, but you can certainly get hurt in an increasingly inflationary environment.
Interest rate returns right now are terrible. Treasuries are the safest, but their yields are the poorest. Who wants to earn 2% on T Bills, especially when inflation is beginning to soar. CDs are doing much better, now mostly offering 3 to 3 1/2 for a few months. If you go out longer, the returns are only slightly better, but then too you are locking your money away for far too long.
In fact, in this environment, the biggest mistake you can make is to try to earn a few basis points more by buying longer term treasuries, CDs or the like. Too much can change fast, and you will feel very foolish sitting there earning 3% when rates climb to 5 and more in time. Your best bet is short term paper, and CDs are offering the best rates at the moment.
Nonetheless, I would leave cash in money market accounts for just a little longer before buying 6 month to 1 year CDs. As more and more banks start really hurting for cash infusions, over the next month or two, there will soon be a real CD rate war and very interesting short-term opportunities will surface. I would not be surprised if one can find the old 5% six month CDs and even 5% one year CDs in a matter of weeks. Already, Countrywide is offering a 6 month at 4.9%. It is about to happen across the board. So my strong advice is sit back, give it a few weeks, and then put your money away short term in CDs.
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