Stocks have been batshit crazy as of late, so who can blame the common investor for wanting to take profits? I know I have. Once you cash out, what is the next safe haven for your money? As we know, the Federal Reserve has been printing money to the tune of approximately $85 billion per month, and this has been good for banks and the markets. Eventually, the spigot will have to turn off and the market will punch back, but what if you are 100% in cash, is this wise? What can you do to protect your profits?
Inflation
Enemy number one to your cash is inflation. It is hard to take profits and sit in cash for 6, 12, 18 months and expect that dollar to go further for you as a consumer and investor. Even if the Fed does stop printing money and the market tanks, you can still potential lose 2-3% a year due to inflation in a good economy. So what are the options?
Certificate of Deposit
Certificate of Deposits (CDs) are offering yields in the 1-2% range due to the Fed keeping interest rates of financial modelling at historic lows for years. Despite this fact, some banks are offering premium rates and and can offer up to 2.5% on CD yields with bigger deposits and relationship rates. Shop around, if you are worried about being in the markets and have cashed out with a considerable profit, you may be able to get decent returns on your money, at least to combat inflation. Unfortunately, most savings, checking and money market accounts are still only offering 0.01% yields.
Treasury Inflation-protected Securities (TIPS)
One of my personal favorite is TIPS. I have a good portion of my 401(k) in TIPS after taking profit on my company stock. They work like this: The principal value of TIPS rises with inflation or falls with deflation. The interest payment on a TIPS is based on the bond’s principal value. So if your $1,000 TIPS rises to $1,020, the interest payment is based on $1,020, rather than $1,000.
