If you decide to sell your investments because you’re worried about stock market losses, where should you stash your cash?
Generally, selling stocks in a down market is not a good idea because it will lock in losses and cause you to miss out on the economic recovery. It may even be the best time to buy more stocks, since the stocks will be available at bargain prices.
But, sometimes it is necessary to sell your stocks. Your portfolio may need rebalancing after dramatic swings in stock and bond prices. Your risk tolerance and investment goals might have changed. Or, you may just need to maintain a sense of control.
You might also need a good place for saving your emergency rainy day fund.
If you need a safe place to invest the cash proceeds from your stock sales, there are several options.
- Money market accounts pay higher interest rates than regular savings accounts, but also provide check-writing privileges. Money market deposit accounts (as opposed to money market mutual funds) are provided by a bank or credit union and are usually FDIC-insured.
- Online savings accounts provide better returns than local banks and money market accounts.
- A high-yield savings account provides higher interest rates than a typical checking or savings account. Most high-yield savings accounts are FDIC-insured.
- Certificates of Deposit (CDs) offer higher interest rates in exchange for withdrawal restrictions, such as an early withdrawal penalty. Most CDs are offered by banks and credit unions and are FDIC-insured. You can address the lower liquidity by using a laddered CD strategy, where you stagger the maturity dates of several CDs.
- Short-term bond funds provide less interest rate risk than mid- and long-term bond funds by continually refreshing the set of bonds in the fund. Short-term bond funds contain short duration bonds that mature within 1-3 years, which are less likely to be affected by an increase in interest rates. Use of a bond fund or index fund instead of individual bonds also provides some diversification.
- Individual U.S. Treasury Bills (matures in less than a year) and U.S. Treasury Notes (matures in 2-10 years), as well as U.S. Savings Bonds can be bought online at TreasuryDirect.gov. U.S. Treasuries are exempt from state and local taxes. The interest on recent Series EE Savings Bonds and all Series I Savings Bonds is tax-free if the bonds are sold to pay for college expenses or the proceeds are rolled into a 529 plan.
- There are 529 plan investment options insured by the federal government, through either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF).
FDIC-insured portfolios and CDs are available as investment options in about a third of 529 college savings plans.
FDIC-insured accounts are safer than other types of accounts and investing in stocks and bonds because the investment is insured and won’t lose value. You can check whether your bank is insured on the FDIC web site. Be sure to stay under the FDIC insurance limit of $250,000.
There is a big caveat about investing in bonds and bond funds when interest rates are very low. Bond prices and yields move in opposite directions. Lower interest rates correspond to higher bond prices. When interest rates are at or near historic lows, there is nowhere for the interest rates to go but up. If interest rates increase, bond prices will decrease, causing losses in the investment. With individual bonds, you can always hold the bond until maturity, but that will make the investment less liquid. There is also a risk of yields going negative in a severe economic downturn.