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From the Mail Bag: How Safe is Your Cash?

I recently received this email from a reader:

Read your article on the safety of my money with my broker. It was quite interesting and necessary as I myself have started to worry about the safety of my money, some of which I have in a bank. But I have my money in cash at several brokerages as I feel I should not buy any stock at this point.

Is my money safe since it is simply in cash? Should I buy bonds simply to have my cash in something that is mine? Could you let me know about this?

This is a great question—I’ve actually been asked by several readers about the safety of their cash. This article does a good job of explaining how the FDIC works and how it protects cash bank accounts. In addition, check out this interview with the FDIC’s Shelia Blair. Finally, in this piece, Gary Schatsky, one of my favorite financial advisers, recommends the Vanguard Prime Money Market fund—it’s the place where I stash my own cash. (Keep in mind that money market mutual funds do not fall under FDIC jurisdiction.)

Now, to answer the question about whether bonds are a safer investment, I’d say: It depends. The reason why I’m hedging my answer is that while Treasury bonds are backed by the full-faith of the U.S. government, they also aren’t yielding much these days. There are better opportunities, for example, in short-term municipal bonds, but those are being whipsawed by all of the recent credit problems. If you want to go the bond route, I’d recommend some of the short-term mutual fund offerings from Fidelity, Vanguard or T. Rowe Price, which are all managed by seasoned pros.

I’m curious to hear your tips. Where are you stashing your cash right now?

Update: After reading this blog entry, Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, pointed out that investors in higher tax brackets should take a look at these funds since the after-tax yields are above 3%. That’s particularly beneficial if you live in a high-tax state like New York or California.

Thanks for the tip, Dan!

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