Posted by: Lauren Young on July 25, 2008
Clarification: Rydex CurrencyShares are actually exchange-traded products (grantor trust structure)—not exchange-traded notes. I’ve updated this post to reflect the changes.
Over the past few months, I’ve fielded lots of questions from colleagues, readers, sources, and even my parents about the safety of cash. Alas, I am not a financial adviser—I just play one on TV.
I asked more than 30 financial advisers what they would do with a $1 million cash portfolio to keep it safe for a year. I could only feature three of them in this week’s magazine. So I’ll use this blog to share some other advice I received.
One of the most aggressive plans came from Don Martin, president of Mayflower Capital, a financial advisory firm in Los Altos, Calif. His portfolio strategy: Put $250,000 in Rydex CurrencyShares Euro Trust (FXE), $100,000 Rydex Currency Shares Australian Dollar Trust (FXA), $100,000 CurrencyShares Japanese Yen Trust (FXY), $50,000 CurrencyShares Swiss Franc Trust (FXF); $500,000 in Vanguard’s Admiral Treasury Money Market Mutual Fund (VUSXX) or SPDR Lehman 1-3 Month T-Bill ETF (BIL).
Martin is a big believer that cash investments should be diversified internationally because of the risk the U.S. dollar could decline. That’s why he recommends stashing 50% of an investor’s cash into foreign currency Rydex CurrencyShares, which are actually exchange traded products (grantor trust structure).
The four currency products he likes are offered through Rydex Investments, mixing currencies from three continents. Each has an relatively low expense ratio of 0.40%, although you do pay commissions to trade these portfolios. Buyer beware: these products are subject to foreign exchange fluctuations.
For U.S. dollar-denominated cash, Martin suggests using a low-cost money market fund that invests in U.S. Treasuries, such as Vanguard’s Admiral Treasury Money Market Mutual Fund. It features a razor-thin expense ratio of just 0.10%. Another option is an exchange-traded fund issued that invests in ultra short-term Treasuries.
However, cash investors should steer clear of municipal bond funds due to hidden credit risk. “Avoid closed-end funds, especially leveraged ones, due to risk of fluctuations in the premium as well as the discount from the net asset value,” Martin says.
I’ll post some other cash strategies on this blog in the coming week.