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Dr. Don isn't reviewing a reader's portfolio in today's column. Noticing that readers' portfolios have been coming in with higher cash allocations or with questions about increasing those allocations, today's column deals exclusively with investing in cash.

Cash investing doesn't mean holding the green stuff in a safe deposit box or stuffed in a mattress. That's because you still want to earn a return on a cash investment; you're just willing to accept a single-digit return in exchange for the safety of principal and liquidity that the cash investment provides.

The term cash is really shorthand for an investment in money market securities. Money market securities are short-term debt securities with a final maturity of less than a year. The three-month, six-month and one-year Treasury bills are money market instruments. So is commercial paper, banker's acceptances, eurodollar deposits, negotiable CDs, federal agency discount notes and repurchase agreements. For a more detailed description,


has a good

tutorial on money market instruments. Not all money market securities are cash instruments as an economist would define them, but money market securities are characterized by their liquidity -- being easily converted to cash.

We all have money market funds attached to our brokerage accounts. That's what keeps our money earning a yield while we search out the next investment opportunity. But is it the appropriate place to hold the cash component of your portfolio if the money might sit there for a while?

Remember that the terms cash and money market securities don't really mean the same thing. Investors in money funds have taken to using the two terms synonymously because the money funds have done such a good job of not "breaking the buck." You buy a money fund for a dollar a share, and you sell it for a dollar a share, so you tend not to worry about the loss of principal when you buy money market funds.

Money funds that invest in commercial paper are inherently riskier than Treasury-only funds, but as long as the industry avoids taking capital losses, investors can feel fairly confident in choosing a fund based on yield. Buying individual money market securities could cause you to lose principal or suffer a dramatically reduced yield if you have to sell the security prior to its final maturity.

So your broker's money fund is the place to be if you want to be able to turn on a dime and put the money back into the stock market. Just make sure your brokerage account is competitive with the average yield for your type of fund. You can find out the average yield on government, nongovernment or tax-free funds at

Money Fund Selector.

What about your bank's money market account? Not at my bank. The national average for MMAs is 4.47%, while the average taxable money fund is yielding 6%. The money market accounts can carry


insurance but that's not worth over 1.5% to me, and most likely isn't to you, either. The Internet banks are much more competitive in this arena, and offer rates on insured deposits that can go toe-to-toe with the money funds.

Bankrate can show you the highest national rates and provide you with a safety ranking on the bank to boot.

Money funds have to keep their average maturity at fewer than 91 days. It's a regulatory measure enacted to protect principal. Money funds will make rate plays and shorten up when they think a fed funds hike is imminent, or lengthen their average maturity when they think rates are going lower, but they can't extend their average maturity past the 90-day mark. You can find your fund's average maturity by using

The Money Fund Report.

So if you're convinced that between now and springtime the

Federal Reserve

will start cutting rates, and you're committed to cash, you'll want an alternative to watching your money fund's yield fall over time. Unfortunately, an inverted yield curve and anticipation of the rate cut(s) have already taken most of the opportunity away from you. The current Treasury yield curve illustrates both points.

With fed funds currently at 6.5%, the three-month T-bill is yielding 5.84% and the year bill is yielding only 5.39%. Fed funds is an overnight interest rate. It's the rate that banks pay to borrow bank reserves from one another overnight. Very short-term money market investments compete against fed funds and will have yields closer to the fed funds rate. As you look toward longer money market investments, the T-bill yield curve becomes more important than fed funds in pricing money market securities.

Direct investment in money market securities can allow you to increase your yield but that yield pickup comes at a price -- the loss of flexibility. The best yield in the money market arena right now on a risk-adjusted basis has to be the one-year negotiable CD. You can get an APY of 7.10% and the deposit is


-insured up to $100,000. You can sell a negotiable CD prior to maturity. The price you receive will depend on current interest rates for that maturity. Like bond investing, you can be long and wrong, but with money market investing you aren't that long so you can't go far wrong. Negotiable CDs have minimum denominations of $100,000, which is also the limit on the Federal Deposit Insurance Corporation insurance. That means your principal is insured on a $100,000 CD but your interest isn't insured.

Buying individual money market securities also may require large minimum investments. Commercial paper is typically sold in $100,000 increments, although some issuers sell CP in $10,000 or $25,000 pieces. Minimums on federal agency discount notes range from $5,000 (Farm Credit) to $100,000 (Federal Home Loan Banks) and the interest income on


of the agency issues is, like U.S. Treasury securities, exempt from state and local income taxes.

In contrast, T-bills have $1,000 minimums and can be purchased online using the

Treasury Direct program. The program now also allows you to sell securities online using the

Sell Direct program. There's a commission charged on sales, but at $34, it's a bargain.

So, decide how much you want to put in cash and how long you might want to keep it there. The more you plan to put in cash, the more important it is to earn a competitive rate on your cash balances. Losing 0.5% on $10,000 costs you $50 in interest income annually. If you're in a taxable money fund yielding less than 6%, you can pick up 0.5% to 1.5% by taking a more aggressive approach to your cash investments. The more likely you are to want to quickly reinvest the money in the stock market, the more important it is to keep the money in a money fund.

Buying money market securities is also a great test of your broker's abilities on the fixed income side. Most of us have found a brokerage relationship in which we're comfortable trading stocks. Having a brokerage relationship in which your comfortable trading bonds can be just as important. If you're putting some money on the sidelines, it's an opportune time to flesh out this side of your brokerage relationship(s).

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent arecommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at