But cash has its virtues. Most important, it lets you sleep better. And everyone eventually needs some liquid currency, whether it's to pay for a minor aggravation (say, to fix a fender bender) or a major one (the car was totaled). Or maybe you have a goal, such as paying a tuition bill or buying a second home, or you'd like to pounce on timely investment opportunities. I am not one of those curmudgeons who proclaim that "cash is trash" and exaggerate the opportunity costs of holding it (potential profits you didn't make) by assuming that you'd have otherwise bought 5,000 shares of a long-shot stock that tripled in a year.
By design, I keep 10% of my IRA in my broker's cash account. When that proportion creeps up, which happened recently when a bond I owned matured, I flag the excess cash and reinvest it in a high-dividend stock and a couple of bond funds.
Beating 1%. All that aside, my mission here isn't to debate whether you should build a cash reserve. You should. Rather, the topic is where you can get 1% or more safely. Let's call 1% the Bernanke Line, a play on baseball's Mendoza Line, the .200 batting average that separates awful hitters from the merely mediocre. (Non-pitchers who bat below .200 need to look for other lines of work; Google "Mendoza Line" for the back story.)
Start by putting 20% of your cash stash in Fidelity Floating Rate High Income (symbol FFRHX, yield 2.9%), which invests in bank loans made to companies with below-average credit ratings. Put 10% in Wells Fargo Advantage Short-Term High Yield Bond (STHBX, 2.0%). Like the Fidelity fund, the Wells Fargo fund takes credit risk but offers some protection against rising interest rates (bond prices move in the opposite direction of rates). For foreign diversification, put another 10% in SPDR Barclays Short Term International Treasury Bond ETF (BWZ, 0.6%). For safety, put 15% into an online savings account and 15% in a one-year certificate of deposit. Then put 15% in a short-term bond mutual fund or exchange-traded fund and another 15% in an ultra-short bond fund or ETF. Choose among top-tier firms, such as Fidelity, Pimco and Vanguard, and the risk of mismanagement will be low.
If you had invested $50,000 in this portfolio at the start of 2014, it would have generated $576 of income and grown in value to $50,172, for a total return of roughly 1.5%. If the second half is as good as the first, you'll earn about 3% for the year. If you count just the income, you'd have earned 1.2% in the first half, putting you on pace for 2.4% for the year. That would put you well beyond the Bernanke Line. For income investors, that's the equivalent of a home run nowadays.