OK, CASH MANAGEMENT doesn’t exactly match the adrenaline high of trading stocks. But managing your cash holdings is a challenging discipline, and a prudent and profitable way to get market experience with considerably less risk. It’s also a lot of fun — especially for less-capitalized traders who can’t afford to play in the majors just yet.
For many of us, cash comes in the form of a money-market account, usually either linked to a brokerage account, bought from a mutual-fund company or sold by a bank. Only bank-sold money-market funds come with FDIC insurance, but all suit the same general investment goals: safety and high liquidity. They are essentially savings accounts — and they’re more for peace of mind than for profit. The problem with money-market accounts is that, in exchange for liquidity and protection of principle, we forfeit the higher returns that come along with even slightly more risky investments. For example, E*Trade Group’s (ET) money fund currently yields 3.7%. Fidelity’s is in the high 2% range. Not exactly champagne wishes and caviar dreams.
But with sound cash management, you can do better. You manage a cash portfolio just as you do a stock portfolio. Using appropriate position size, money management and risk controls, you can improve results with only marginally higher levels of risk. (more…)