Four Principles of Managing Money for Those With Lots of It

The essentials change when you have $100,000 or more in cash to manage. Once you’re in the six figures, those blips in interest rates and dividend yields quickly can add up to real money so you’re keenly interested in small changes. Although your cash stash is a hefty one, preservation and liquidity are still crucial.

We've just lived through financial trouble so bad that even some money-market funds got into trouble. There was no place to hide in the market meltdown of 2008-2009. Conservative as well as aggressive funds took a beating. And the stock market functioned so badly that it made no distinction between sick companies like General Motors and prosperous ones like General Dynamics. The brisk market bounceback has steadied the nerves of most investors. But these days every investor has a better appreciation for safety and soundness.

If you're fortunate enough to have more money than most people, there’s good news: Having that much cash entitles you to certain benefits. For example, you can sometimes earn a better rate on savings accounts and certificates of deposit. Think of these pluses as benefits of buying financial services in bulk.

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However, once you’re in the high-net-worth club, you may also be tempted by investments available only to club members. Be careful. These are often the worst choices for your cash stash.

Many of the chanciest and least liquid investments can legally be sold only to “accredited” investors, defined by regulators as someone with a net worth of at least $1 million and annual income of $200,000 or more.

If you meet that definition, you become eligible for a bunch of private stock offerings; non-traded real estate investment trusts and partnerships; hedge funds; oil-and-gas deals and tax shelters. But access to these ventures is not exactly the spoils of success. These investments come with high sales commissions, limited liquidity, and potential tax trouble. There’s no evidence that such investments work better than similar offerings that are available to everyone.

So resist the lure of these more exotic investments, especially when it comes to your cash. You need to manage that stash by following four ironclad principles:

Maintain liquidity

You may well have most of your wealth tied up in real estate, life-insurance policies and annuities, pensions, and equity in a business. But you need to balance all that with cash and cashlike instruments that you can access quickly and without cost. That means investments without redemption fees, surrender charges or early-withdrawal penalties.

Savings bonds, for instance, are not redeemable for one year. You forfeit some interest if you cash in a savings bond before five years. These make great gifts for kids, but aren’t right for your cash reserves regardless of what interest rate the government is paying.

Money-market mutual funds normally are tops for safety and liquidity, but their rates today are hugging zero. CDs are paying next to nothing, too. A better idea is a standard online savings account, such as those from Ally Bank, American Express Bank, EverBank or ING. This type of account, which has no fees and no restrictions for moving in and out, gets thumbs up from many financial advisers. Kris Burak, of Rehmann Financial, a CPA and investment advisory firm with offices in Michigan, Ohio and Florida, says these banks are “one-stop shops” where you don’t have to worry about safety or surprise fees or restrictions.

Online savings accounts today pay 1.5% at best, but that’s still $1,000 to $1,500 a year on $100,000 (before taxes). Some online banks (which include traditional banks’ virtual branches) pay about a quarter-percent above their base rate on “jumbo” accounts, which typically require an investment of at least $50,000. Just don’t place more than $250,000 in one account at one bank ($250,000 is the maximum insurance that the Federal Deposit Insurance Corp. provides per each account; if you have, say, a regular account, a custodial account and an IRA at one bank, each is covered up to $250,000 by the FDIC). If you have more than $250,000 in one kind of account, it’s probably wise to divide the money among several banks. That will protect you from the risk of your bank going under. (Note: Under current law, the FDIC insurance limit is scheduled to return to $100,000 in 2014.)

Wilmington Trust, a Delaware-based bank that concentrates on high-net-worth customers, offers WT Direct savings, which doesn’t have the highest rates but lets you talk to a live banker 24/7. To some that may be worth a couple hundred dollars a year in lost interest. Currently the rate is 1.16% on deposits of $10,000 or more.

Seek higher yields

Convenience is one thing, but a savings account with a rate of 1% to 1.5% probably doesn’t cover your personal inflation rate, which is subject to unsteady gasoline and utility prices, home repairs and medical expenses. Hence, this suggestion: For every $1 you hold in bank savings, seek a better yield on another $1.

Lisa More, Wilmington Trust’s vice-president of fixed-income investment management, suggests establishing a barbell of high-quality Treasury, corporate or municipal bonds. In this particular case, the barbell would contain a large weighting of short-term bonds and a virtually equal weighting of long-term bonds. More’s idea is to have some that mature in three years (these would be more stable in price) and some that mature in ten to 15 years. All told, this portfolio should pay out about 3% annually.

Bonds that take longer to mature lose value when long-term interest rates leap, but More believes that under current conditions short-term rates are more likely to rise first. That wouldn’t hurt bond values nearly as much. You’d be wise to open an account with the U.S. Treasury through Treasury Direct, where you can buy, sell and hold government bonds at no cost.

Nearly mature, high-coupon corporate bonds represent another way to safely earn more than you would with CDs and savings accounts, says Tim Courtney, of Burns Advisory Group, in Oklahoma City. These are non-callable bonds, issued back when interest rates were higher than they are now, that have just a couple of years before they mature. In mid-April, these bonds yielded 2.5% to 3%. Listings are plentiful on brokerage bond marketplaces such as Charles Schwab’s. Or use the Vanguard Short-Term Investment Grade Bond fund, (symbol VFSTX), which yields 2.3% with minimal price fluctuation. The fund is 29 years old, and its share price has never left the narrow range of $9.50 to $11.19. Most days, it moves no more than a penny or two.

Depending on your state and federal income-tax brackets, you may prefer short-term, tax-free bonds or funds. Today, though, tax-free investments rarely yield enough to make sense. The Fidelity Short-Intermediate Municipal Income Fund (FSTFX) presently yields 1.5%. For someone in the top federal income tax bracket of 35%, a top-bracket New York City resident, that’s the equivalent of 2.3% from a taxable investment.

Individual three-year municipals rated single-A or better sometimes yield more than 2% to maturity, but they’re scarce. Taxable municipal bonds, called Build America Bonds, pay high yields but are almost always sold in maturities of 20 years or longer, which means they aren’t cash substitutes.

Insist on quality

Investment-grade bonds of any breed rarely default (that is, miss an interest payment, a development that usually leads to a massive decline in a bond’s value). So don’t listen to commentators who suggest that state governments -- let alone the U.S. Treasury -- are going out of business. A few cities, towns and local-government projects are on thin ice, but that’s always the case. In sum, all government and corporate bonds rated triple-B or better, as well as the overwhelming majority of bond funds that invest according to those standards, are safe from default risk.

Diversify for safety

Obviously that means you should hold different typesof investments. But should you diversify among different institutions when stashing your money? If you hold cash in a bank, in bonds or in mutual funds, it’s probably not necessary. But as we’ve seen in recent years, brokerage houses can get in trouble and tie up your cash. So if your cash stash is held in just one brokerage house, consider putting a chunk in another brokerage house or in a mutual fund company.