- Predictable earnings
- Highly liquid
- Relatively low risk to principal
- Relatively low returns
- May not outpace inflation
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid.
Types of Investments: Cash
Cash and cash alternatives
In daily life, cash is all around you, as currency, bank balances, negotiable money
orders, and checks. However, in investing, "cash" is also used to refer to so-called
cash alternatives: investments that are considered relatively low-risk and can generally be
converted to cash quickly. Some examples of cash alternatives include savings accounts,
money market accounts, certificates of deposit, guaranteed
investment contracts (GICs), government savings bonds, U.S. Treasury bills, Eurodollar
certificates of deposit, and commercial paper.
Using cash alternatives
Because of their conservative nature, cash alternatives involve a lower level of risk.
However, there is a tradeoff for their relative safety: Their potential return is
not as high as investments that involve more risk. By focusing solely on playing
it safe, you may limit your investment income, especially over longer time periods.
Cash alternatives can be useful in many ways. First, they can provide relative stability.
While cash alternatives can't assure you of a gain or protect you from losses, they
are generally considered safer than other asset classes, such as stocks or bonds.
Also, they can provide income on cash that would otherwise be idle. They can serve
as a ready source of cash to pay bills or make purchases. For example, cash alternatives
can help preserve money earmarked for a down payment or a family vacation. Readily
available cash also can help you cope in a financial emergency. Finally, cash alternatives
can serve as a temporary parking place when you're not sure where to invest.