Astute investors may turn to alternative investment strategies such as Lower Volatility Portfolios, managed futures, complex derivative instruments, Timber, Commodities, REITS, and various types of hedge funds to seek larger returns. However, the amount of investment knowledge necessary in order to invest in some of these higher level strategies with the exception of the Lower Volatility Portfolios may not be so attractive to investors, many of whom are conservative by nature. Some traditional investors who like investing their monies in traditional U.S. equities may want to develop a second alternative, which is maintaining a high level of cash within their portfolios.

Maintaining a high level of cash may not necessarily be such a bad idea. With short-term interest rates on the rise, and long-term interest rates for the most part remaining relatively stable, at least for now as the yield curve stands, short-term debt (money market-like) instruments have been providing more attractive returns than most other types of fixed income investments. On December 13, 2005, the Federal Reserve Board (Fed) had raised the federal funds interest rate, which represents the rate banks are charged for short-term overnight lending to other banks to 4.25% which was the 13^th straight 25 basis point increase since May of 2004. In addition, there does not appear to be an end in sight to the level the Fed is willing to raise the short-term federal funds rate. In fact, thirty-day federal fund futures contracts continued to sell at higher interest rate levels than what the federal funds rate is currently at. In looking ahead at futures contracts for January and February, in which, contracts are selling with interest rates bidding at 4.270 and 4.485 respectively.

Given the recent increases in short-term interest rates as well as the future expectations of continuous raises still to come, investors who do not want to consider some of the more advanced investment strategies may find value by maintaining a larger percentage of their portfolios in cash.

The common investment vehicle utilized as a cash equivalent is a money market mutual fund. These funds are composed of a variety of short-term, highly liquid debt instruments in which average maturities usually come due within 6 months or less. Short-term U.S. Government Securities, high quality corporate commercial paper, short-term repurchase agreements, reverse repurchase agreements, federal fund futures contracts, and Eurodollar futures contracts are typical securities utilized by money market funds. High levels of trading activity occur on a daily basis in order to maintain adequate liquidity so that investors can convert their position in money market funds into cash immediately upon request.

Other investments that can be used as cash equivalents include certificates of deposit (CD’s), bank money market funds and U.S. Saving Bonds. Some banks are even offering CD’s that adjust their interest rates upward on a quarterly or semi-annual basis.

Despite the concerns of investors in regard to maintaining a larger cash position relative to assets that have displayed larger historical returns, money market funds have provided attractive yields recently. Most of the debt instruments previously mentioned are yielding in the 3.50% 4.50% range. In addition, federal fund futures contracts as well as Eurodollar futures contracts are both selling at discounts, which given the rise in short-term interest rates, have been increasing the total return on both contract types. With yields currently rising, the yield on the overall portfolio is enhanced. By maintaining the position in 9 money market portfolio, investors have been receiving more attractive yields, ranging from a minimum of 2.75% up to 3.75% and in some cases, even more 3.75%.

While 2.75% to 3.75% may not seem attractive to some investors, it is an attractive yield compared to most of the major market indices’ recent performance, especially when you add in the volatility factor. As mentioned previously, the S&P 500 Index had returned only 4.91% in 2005. If you take away the volatility of the S&P 500 index and can provide returns that are nearly equal or in some cases better, money market portfolios have suddenly turned into a much more attractive investment. As a result, maintaining cash in one’s portfolio and not taking on the volatility of the equity markets provides a safer and in some cases, more attractive investment opportunity for investors, especially when interest rates are expected to rise indefinitely. However, with money market portfolios providing yields greater than what they were just a little over a year and a half ago, before the Fed began raising the federal funds rate in 25 basis point increments up to 4.25%, we believe that money market mutual funds are a somewhat attractive and safe environment for investors to maintain at least a small portion of their investments until most equity securities decrease in value to attractive valuations (approximately a 30% decrease would provide some opportunity for better future returns in equities.) Risk-Controlled Investing’s Lower Volatility Portfolios have been developed behind a "Margin of Safety" concept. While these types of portfolios don’t require even small money market fund balances, most investors that do not invest in this manner and instead utilize a traditional domestic stock and bond mix should invest at least a substantial portion of their portfolio in a money market position to maintain principal. Over the long run they will be substantially better off than if they had taken on the high volatility of being in the stock market. This strategy may not prevent losses, but it could be an effective method of minimizing them.