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Uses of Idle Cash?


kyleholmes
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Uses of Idle Cash!

 

There are alot of different options out there for idle cash to sit until the 60 miles an hour fast ball comes across the plate and I was curious where other board members park there cash, when they have any? Any favourite places? Canadian and US Funds? This is something that I have yet to see talked about on the board, so quite interested in hearing the responses!

 

Thanks in advance!

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With the current prevailing interest rates being soooooo low, IMO there is only one place where I will put cash, and that's in a government insured bank account.  At this point, I don't really care about the interest rate as short-term money generally yields less than 2% on pretty much any vehicle.  There's not much point in taking ANY risk of a permanent loss of capital by using a non-insured short-term investment vehicle when your incremental return from so doing is extremely small.

 

We should not forget the lessons of last fall when people who held money market funds (that were thought to be liquid) could not access their money...

 

In today's environment, CDIC or FDIC insurance seems like a no-brainer.

 

SJ

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In Canada (interests are not deductibles) paying back your home mortgage is basically the safest way to have about a 7% return on your investment and even better it's risk free. The problem is that this is not liquid money anymore!

 

If I were to advise someone for the best risk/rewards I would say:

-Pay credit cards

-RRSP

-Home mortgage

-TFSA

-Normal Stock and bond account

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In Canada (interests are not deductibles) paying back your home mortgage is basically the safest way to have about a 7% return on your investment and even better it's risk free. The problem is that this is not liquid money anymore!

 

On the contrary, you can have your cake and eat it too. Pay down your mortagage BUT arrange for a line of credit to replace the portion of your mortgage you repaid. The LOC gives continued access to liquidity and provided you use it strictly for investment purposes, the interest paid BECOMES tax deductible. To be prudent you should continue to pay the same mortgage instalment that you did before so that you are not increasing your overall debt.

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How about a good drug or alcohol habit.  Usually takes care of idle cash.  :P

 

Surely you can do better than this! How about investing in my soon to be launched Madoff Weizhen Tang Guaranteed Not Ponzi Fund?! ;D ;D ;D

 

Seriously though, I think preferreds are still a good cash alternative (assuming this is cash for investment and not cash for a house or college expenses next year). Apart from the tax-advantaged treatment of dividends, they also offer a significant yield pick-up over cash - e.g ORH-A offers 8%, ELF pfds in Canada pay about 6.5%, FFH's recently issued pfds are 6.5%. (6.5% in Canada is equivalent to 9% pretax - a huge pickup over 0% cash!)

 

While it is true that some of these could have some downside risk if the markets suffer a major correction, they should not fall as sharply and you can switch back into cheap stocks as hoped for. If markets continue to stay up, at least you get paid for waiting. In the best case scenario, the economy slows, stocks fall, but bond and pfd yields compress and you even make some gains on the pfds.

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Apart from the tax-advantaged treatment of dividends, they also offer a significant yield pick-up over cash - e.g ORH-A offers 8%, ELF pfds in Canada pay about 6.5%, FFH's recently issued pfds are 6.5%. (6.5% in Canada is equivalent to 9% pretax - a huge pickup over 0% cash!)

 

Oops! Coorection: FFH's pfds yield just under 6%.

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wfc-pl still yields over 8%.....$75 a year on a $900 current price.  The yield is tax advantaged until the laws change in a few years (in the U.S.)....not sure how it works in Canada.

 

I actually can't believe this thing still has such a high yield.  Granted, it is non-cumulative, but I think the odds of Wells not paying on it are miniscule and they have to pay as long as they have a dividend on the common.  The final kicker -- for those who want to collect this for a long time (say, retirees) -- is that Wells can't call the issue until the common trades over $200 (or thereabouts) for 20 of 30 trading days.

 

Thanks to this board -- it was either ericd or oec -- that highlighted this one.

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With the M&A world perking up lately, I am finding lots of deals to arb. I ONLY do cash takeovers, and snag that last bit that annualizes out to many times money market rates. Right now, I have ASPM, AVCT, HSR, ORH, PER, STAR, and VARI.  When M&A is really hoppin', a person could easily do nothing but arbs and make a great living.

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Seriously though, I think preferreds are still a good cash alternative

 

Prefs are good for long term uses of cash as fixed income, but as a place to keep your dry powder they aren't so good.

 

They tend to be illiquid so if you are looking to liquidate on a given day, especially if there is a selloff and the markets sieze up a little, you may not get the price you wish to get at all.

 

If you're putting up $25,000 it's one thing, if you're trying to put up more it becomes difficult. If you're going to use prefs to store cash, the best thing to do would be to buy lots of different issues so if you want to liquidate you don't move the respective markets when you come out.

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For preferreds, liquidity is only one issue.  The other major issue is the risk that interest rates take a sudden jump which can have a drastic impact on the market value of a perpetual (this is a legitimate risk in Australia and Canada these days....).  IMO, you should only buy a preferred when the perpetual income stream is attractive in the context of the risk to which this issuer is exposed.  If you think that you'll need your cash back soon, a preferred might be a poor choice.

 

There is, however, an exception to this.  The re-set preferreds that have been issued in Canada are much less susceptible to fluctuations in

interest rates as the return will always be re-set to "roughly market rates" in a maximum of five years.  For this reason, the valuation of re-set preferreds should not tend to jump around so drastically.

 

I still prefer a government insured bank account for money that I know I will need to access in the near future...

 

SJ

 

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