If you’re saving up for the next stock market plunge, you should keep your cash working while you wait!
The stock market has bounced back quickly from recent selloffs and the summer’s downturn, as it often does. For investors holding cash for the next stock market plunge, this won’t be the last buying opportunity. However, finding the right time to jump in may take longer than expected. That’s why it’s crucial to keep cash working by earning the best possible returns while waiting for that perfect investment moment.
This is where “near cash” or “arms-length cash” strategies come in. There are several ways to maximize short-term returns based on how much money you have set aside and when you might need it. Financial experts often recommend keeping a portion of your portfolio in cash to take advantage of market opportunities, but letting that cash sit idle could result in lost earning potential. Recent interest rate hikes have opened up new ways to generate higher returns on cash. In addition to that, cash can also serve as a hedge against market volatility.
How To Keep Your Cash Working While You Wait For The Next Stock Market Plunge
Before you learn ways to do that, is important to note that not all “near cash” investments are risk-free. Make sure that yours is held with a member institution insured by the Canada Deposit Insurance Corporation (CDIC). The CDIC, a government-backed entity, insures deposits up to $100,000 per financial institution.
Because of this limit, it’s also wise to restrict your deposits to $100,000 per institution. Most Canadian banks, federally regulated credit unions, and trust companies are CDIC members. You can verify membership on the CDIC website. In the event of a member institution’s failure, eligible account holders will be contacted, and both principal and interest will be reimbursed within days.
High-Interest Savings Accounts
If you want to act quickly in the market, having liquid cash is key. One of the most common forms of “near cash” is a high-interest or high-yield savings account. Most investment firms offer these accounts, and it’s easy to transfer cash within your portfolio when needed.
The interest rate for these accounts is referred to as the annual percentage yield (APY). While the APY is stated as an annual rate, it is typically calculated over shorter periods. High-yield savings accounts can offer interest rates that are up to ten times higher than those of regular savings accounts, with some even exceeding 5% currently. Generally, the more cash you deposit, the higher the potential yield.
The downside to high-yield savings accounts is that their rates are variable and can change daily. With central banks, like the Bank of Canada, currently lowering their benchmark rates, yields on these accounts are on the decline.
Money Market Funds
To automatically tap into the best short-term rates, you might consider money market funds. These are a type of mutual fund that invests in highly liquid, near-term instruments such as cash equivalents securities and short-term debt-based securities with high credit ratings. In most cases, investments in money market funds can be cashed out within a day or two.
While money market fund returns also fluctuate, they can help maximize yields when general interest rates fall. However, these funds come with annual fees, known as management expense ratios (MER), which can be up to 1% of the invested amount. Despite that, even after deducting these fees, they often offer yields that can exceed those of high-interest savings accounts.
Guaranteed Investment Certificates (GICs)
If you’re willing to commit your funds for a longer period, GICs (Guaranteed Investment Certificates) can provide a higher, fixed return. Yields on one-year GICs from major providers have recently dipped just below 5% due to central bank rate cuts, and they may have reached their peak for the near future.
So, if you’re okay with locking in your money for a set time, this could be a final chance to secure high short-term yields. A common strategy with GICs is to stagger their maturity dates to keep a steady flow of income.