It's not sexy -- not by a long shot. It isn't the sort of thing that'll get you a lot of attention at cocktail parties. And don't expect to double your money by next Tuesday, either. But just one investment promises you that tomorrow, it'll be worth exactly what you paid for it, plus a tiny bit more. It's cash, and it belongs in your portfolio.
The hardest thing about holding cash as an investment is that it's boring. Every day, you read about hot stocks rising and cold stocks crashing down to earth. Companies like Dendreon (Nasdaq: DNDN ) and its newly recommended cancer drug can make you rich in a single day, while others such as New Century and its subprime plummet toward bankruptcy have cost investors everything they had.
In contrast, cash doesn't take much thinking. Of course, if you want something esoteric, the ETF craze is happy to oblige you with access to foreign currency cash options by way of CurrencyShares Euro (NYSE: FXE ) and Japanese Yen (NYSE: FXY ) , to name just a few of your options. But to keep things simple, all you really need to do is figure out how to earn the best interest rate on your money. With all of the high-interest savings options available these days, you should expect to get around 5% without any risk at all. In fact, this month's new issue of the Rule Your Retirement newsletter goes through your best options for your cash.
America's biggest companies agree
Corporate America firmly believes in keeping plenty of cash on hand. According to a study cited in The New York Times late last year, American companies have nearly doubled their cash levels over the past 25 years. Although the study points out that large companies such as Microsoft (Nasdaq: MSFT ) and ExxonMobil (NYSE: XOM ) both have cash reserves in excess of $30 billion, the trend also holds true for smaller companies. The study suggests that increasing risk in cash flow may have given companies greater cause to reduce investment and debt levels in favor of liquid assets.
Of course, cash levels by themselves don't necessarily indicate safety with a corporation's finances. With the ever-increasing magnitude of derivative transactions among companies, a great deal of cash may be held as a reserve against the risk these transactions involve.
Best in moderation
Like many things, however, you can have too much of a good thing if you rely solely on holding cash as your investment strategy. Over short periods of time, cash performs well and lets you reach short-term goals in a predictable manner without the unpleasant surprises that stocks and bonds can bring.
Over the long haul, however, cash hasn't traditionally performed well. After accounting for taxes and inflation, you can't expect to get ahead by holding cash. Unless you have so much money that you never again need to worry about owning risky investments, holding substantial portions of your portfolio in cash for long periods of time is a losing proposition.
The next time someone asks you for an investment with no risk and decent returns, forget about the latest 20-bagger. Just pull out your latest savings-account statement. For many purposes, it's a perfectly useful strategy.
Learn more about how cash plays an important role in your retirement savings plan by looking at this month's issue of Rule Your Retirement. Our team of retirement specialists will tell you how to balance your need for security with the best returns you can find. Take a look at what Rule Your Retirement has to offer with a free 30-day trial.
Microsoft is a Motley Fool Inside Value recommendation.
Fool contributor Dan Caplinger keeps a decent amount of cash on hand, along with plenty of other investments. He doesn't own shares of the companies discussed in this article. The Fool's disclosure policy is good as gold.