Where to stash cash in a down rate market
By Laura Bruce • Bankrate.com

Let's see, back in mid-November 2000, the one-year CD was yielding 5.55 percent.

In mid-May 2003, a one-year certificate of deposit yields 1.26 percent.

Ouch.

If you have CDs or Treasuries that are maturing and want to replace them, you know this interest rate environment stinks.

What are the options for getting the most return for money you want to keep fairly liquid?

We asked four experts what they'd do given the current rate situation and the fact that everyone seems to be guessing whether the economy will turn around this year:

Stewart Welch, The Welch group, Birmingham, Ala.
"If rates are flat, then it's all about current rates. We'd go to Bankrate.com and search for the CDs. What are they paying? Compare that to the best yields in the money market funds.

"We probably wouldn't go much beyond that for something that's a maturity of 12 months or less. If you look at those two and you made an assumption that interest rates were going to drift down, go with the CD. You would lock in the rate for 12 months while the money market will deteriorate on a daily basis. If interest rates are drifting up, go with the money market -- get the benefit of daily rate increases. If it's neutral, pick whichever one has the highest rate.

"Define the time horizon in which you have the money. If you need it in less than three years, keep it out of the market. If you thought interest rates would trend down over the next five years and you want 40 percent allocated to fixed income, use bonds and Treasuries as a substitute to equities."

Kathleen Day, The Enrichment Group, Miami, Fla.
"If it's cash for emergency funds, I'd move it to money market funds for a better rate or just for the convenience.

"If I don't get a premium for having it in a CD I'm not keeping it there. If we were doing CDs it'd be for just three or six months. If I'm looking at a time horizon where I can target maturity -- say I have some cash and a student going to college in two years, I'd look at corporate bonds where the maturity date matches the date when I know I need the money.

"If the money's inside an IRA and I know it'll be there a while, as part of my asset allocation I might use a stable value fund. It's kind of like a corporate bond fund but they have an insurance overlay where principal is guaranteed. The yield is a little higher than with a traditional Treasury because of the inherent volatility in a corporate bond, but since it's insured you won't see that volatility. Look at the yield and decide if it's worthwhile."

Jason Flurry, Legacy Partners Financial Group, Woodstock, Ga.
"The best strategy in times like these is the same as always: Ladder maturities of CDs and Treasuries over a period of five to seven years. Rates go up and down in cycles. By laddering you'll have money to take advantage of the ups and downs. Average returns tend to be better with laddering than if you randomly pick maturities based on current conditions. It also removes emotions from financial planning because you always know what to do with the money. You'll love some of the rates and hate the others. The highs and lows will wash each other out and you'll end up with a better average return.

"Some people will have cash needs. For that, the non-bank money market funds such as Fidelity or Vanguard are the best. They don't usually skim fees out of the yields like many banks and brokerage firms do. Also, typically, they lag the Fed rate cut so you catch a break for about three or four weeks. The bad news is when rates are going up the reaction is also delayed.

"It looks like we'll see another half-point rate cut before the Fed is through. They'll probably take the rate to 3.5 percent. The Fed cuts affect the shorter-term rates; they do very little to affect the five-year rate, which is pretty stable right now. With the ladder it's not difficult to get 5.5 percent, 6 percent or even 6.25 percent now for the long rates."

Greg McBride, financial analyst, Bankrate.com
"Those investors who have painstakingly constructed a laddered CD portfolio are now reaping the benefits as only a portion is being reinvested at a time when yields are the lowest since 1994. Much as a diversified stock portfolio has protected against the carnage in tech stocks, diversifying a cash portfolio by laddering offers protection from reinvesting the whole bundle when yields are low.

"The risk of going long-term now is locking up too much money for too long a period at too low a yield. High-yield money market accounts are a fine alternative -- easily 4.5 percent, 5 percent or more with modest minimum deposits. The Internet banks, money markets or high-yield CDs are outpacing Treasury securities. That more than compensates you for the income-tax benefits Treasuries provide."

How to ladder a CD portfolio