Alternatives to Cash

Nearly all proven investors agree most assets are now moderately overpriced. Now what? Like most people (including some famous ones), you can’t stand to sit on the sidelines — even though you probably should. Here are some alternatives for the action-oriented.

First, you could buy extremely short-term paper, either directly or in the form of money markets. This is debt, issued by governments or corporations, that is paid off in a matter of a few months, limiting your exposure to sudden shifts in interest rates.

Some advisers suggest investing in TIPS, which are inflation-protected U.S. government bonds. The thinking is that, since interest rates basically move in response to inflation, you are somewhat protected against interest rate moves.

I don’t agree with this reasoning, because the Federal Reserve has clearly stated their intention to prevent inflation by raising interest rates. If you believe them, then the logical conclusion is that TIPS will fall in value as yields rise.

You could invest in foreign TIPS, such as the French OATies discussed recently. This would protect you from a fall in the dollar, and to a lesser extent from inflation. BUT, it wouldn’t protect you from a RISE in the dollar, which could occur if interest rates shot up. The only good news here is that recent reports suggest the European Union is less inclined to raise rates in response to inflation.

The best alternative, in my mind, is probably a basket of short-term paper in various currencies. In coming weeks I’ll be researching this in detail, and will reveal my findings here…