Live Dangerously

This story appears in the December 19, 2011 edition of Forbes magazine.

Cash returns -2%. Avoid it.

Who��s sitting on all that cash��$1 trillion in money market funds and $7 trillion in bank deposits and -folding money?

Crybabies. People who don��t understand the difference between liquidity and safety. People who have been given bad advice by financial experts.

It��s a shame. Cash in your sock drawer is bad for the economy and bad for you. It hurts the economy because it��s not being put to use in consumption or investment. It hurts you because cash has a yield of 0%, which means that its real yield (yield less inflation) is in the neighborhood of �C2%.

The standard advice from the experts goes something like this: Put your long-term savings, such as for retirement, in stocks and bonds. Then have at least six months of household spending safely tucked away in money funds or bank accounts, in case you get laid off or need to replace the roof.

That��s bunk. I think you should live dangerously. Spend, or invest, to the hilt. Keep only enough in the bank to avoid overdraft charges.

How did cash get to be so popular? It provides two things that a household needs��safety and liquidity��and people got in the habit of acquiring the two in a single asset.

But we��re in a different century now, when technology allows you to get your safety and liquidity from -separate sources. By getting them separately, you can avoid that �C2% return.

The first place to look for liquidity is in a brokerage account. If you have any investment sense, you have all or almost all of your savings invested in extremely liquid things like Treasury bonds, listed stocks, no-load mutual funds and exchange-traded funds with tiny bid/ask spreads. That is, you never buy convoluted, high-fee products like hedge funds and variable annuities.

If you need cash, go online and click on the sell button. Your com! mission is $9 and your cash is available in three days. Need cash sooner than that? A margin loan will do the trick. If you have $200,000 invested, you can pull out $100,000 immediately this way while your sell order is in process. You��ll owe margin interest, but only for three days.

Depending on how it��s held, a mutual fund position can turn into cash in as little as 24 hours. An electronic link between your fund company and your commercial bank might be helpful.