Where Should High Net-Worth Investors Park Their Cash?
As a high-net-worth investor, you may have substantial financial assets with which you’re seeking different ways to preserve and grow your wealth. One critical decision you face is determining where to park your cash. The choice of where to invest is essential, as it can significantly impact overall portfolio performance.
This article aims to provide investors with significant assets with insights into various investment options worth considering when deciding where to park cash. After all, you’ve worked so hard to build your wealth you don’t want your real-time need for liquidity to undermine your long-term goal of wealth preservation.
Here are a few smart strategies that, when used together in some combination, can help you build and protect your wealth while also keeping cash available.
Diversified Investment Portfolio
A diversified investment portfolio is a fundamental strategy for wealthy investors. This involves spreading investments across different asset classes to minimize risk. Cash can be allocated to various assets, such as stocks, bonds, real estate, commodities, and alternative investments.
Stocks: Investing in high-quality stocks can offer long-term capital appreciation and potential dividends. High-net-worth investors may consider blue-chip companies with a strong track record and stable financials.
Bonds: Government bonds and corporate bonds provide a more conservative option, offering fixed interest payments over a specified period.
Real Estate: Real estate investments can provide steady income through rental yields and the potential for property appreciation.
Commodities: Investing in commodities like gold, silver, and oil can act as a hedge against inflation and market volatility.
Alternative Investments: Hedge funds, private equity, and venture capital funds offer opportunities for diversification and potentially higher returns.
High-Yield Savings Accounts
If you’re seeking liquidity and safety for your cash, high-yield savings accounts are worth considering. These accounts typically offer higher interest rates than traditional savings accounts, helping to preserve wealth in a low-risk environment. Though the returns are not as substantial as other investments, high-yield savings accounts provide easy access to funds, making them suitable for emergency funds and short-term cash needs. With so many banking options available these days, just make sure whatever high-yield savings account you choose is FDIC-insured.
Money Market Funds
Money market funds are another option if liquidity and stability is a priority. These funds invest in short-term, low-risk securities, such as government bonds and highly-rated corporate debt. They aim to maintain a stable net asset value (NAV) of $1 per share, making them an attractive option for preserving capital while potentially generating modest returns.
Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are time deposits offered by banks with fixed interest rates and maturity dates. Investors can choose CDs with varying maturities, from a few months to several years, depending on their liquidity needs. CDs provide a guaranteed return, making them an arguably more secure option for parking cash.
Treasury Inflation-Protected Securities (TIPS)
If you’re concerned about inflation eroding your cash's purchasing power, consider Treasury Inflation-Protected Securities (TIPS). These government bonds are designed to protect against inflation by adjusting their principal value based on changes in the Consumer Price Index (CPI). TIPS offer a fixed interest rate and can be an effective hedge against rising inflation.
Municipal Bonds
Municipal bonds are debt securities issued by state and local governments to finance public projects. They offer tax advantages as the interest income is typically exempt from federal taxes and, in some cases, state taxes for residents of the issuing state.
For example, interest income from Florida municipal bonds is exempt from federal income taxes, making it an attractive option for individuals in higher tax brackets. Additionally, Florida residents enjoy the advantage of tax-free interest at both the state and local levels. This exemption allows investors to keep more of their investment returns, enhancing the after-tax yield. Municipal bonds not only provide a stable source of income but also offer tax benefits that can be particularly advantageous for Florida residents seeking tax-efficient investment opportunities.
International Investments
Diversifying into international investments can offer exposure to different markets and potentially higher returns. High-net-worth investors can consider investing in foreign stocks, bonds, or mutual funds that focus on international markets. However, international investments come with currency risk and geopolitical considerations that need to be carefully assessed.
Conclusion
Wealthy investors face the challenge of finding suitable options to park their cash while preserving and growing their wealth. A balanced and diversified approach is essential, combining various investment vehicles to meet specific financial goals and risk tolerance. From a diversified investment portfolio to high-yield savings accounts, money market funds, CDs, TIPS, municipal bonds, and international investments, each option comes with its own set of advantages and considerations.
Before making any investment decisions, you, as an investor, should consult with a financial advisor who understands your unique circumstances and can tailor a strategy to align with your financial objectives. The key is to strike a balance between risk and return, ensuring the cash is parked in alignment with your long-term financial goals. Be sure to reach out if you have questions or concerns about your financial situation and would like professional advice.
Rob Edwards is a Managing Director and Senior PIM® Portfolio Manager at Edwards Asset Management. Rob is a nationally recognized advisor who helps millionaire families navigate the complexities of their wealth. The firm has offices in Naples and Fort Lauderdale, Florida.
Wells Fargo Advisors Financial Network does not provide legal or tax advice. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Edwards Asset Management is a separate entity from WFAFN.
All investing involves risk, including the possible loss of principal.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can cause a bond’s price to fall. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.
The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Alternative investments, such as hedge funds, funds of hedge funds, managed futures, private capital, real assets and real estate funds, are not appropriate for all investors. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicle. These funds carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. The high expenses associated with alternative investments must be offset by trading profits and other income which may not be realized. Unlike mutual funds, alternative investments are not subject to some of the regulations designed to protect investors and are not required to provide the same level of disclosure as would be received from a mutual fund. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the fund and the investor. An investment in these funds involve the risks inherent in an investment in securities and can include losses associated with speculative investment practices, including hedging and leveraging through derivatives, such as futures, options, swaps, short selling, investments in non-U.S. securities, “junk” bonds and illiquid investments. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Other risks can include those associated with potential lack of diversification, restrictions on transferring interests, no available secondary market, complex tax structures, delays in tax reporting, valuation of securities and pricing. An investment in a fund of funds carries additional risks including asset-based fees and expenses at the fund level and indirect fees, expenses and asset-based compensation of investment funds in which these funds invest. An investor should review the private placement memorandum, subscription agreement and other related offering materials for complete information regarding terms, including all applicable fees, as well as the specific risks associated with a fund before investing.
TIPS interest rate, which is set at auction, remains fixed throughout the term of the security. The principal amount of the security is adjusted for inflation, but the inflation-adjusted principal will not be paid until maturity although the adjustment will be subject to income tax in the year it was earned.
