By Jeff Brown
If you put money into cash holdings like certificates of deposit (CDs), bank savings or money market accounts, you’ll earn just about nothing.

So maybe it’s a good time to bulk up on cash, anyway.

Or maybe not, it really depends on your long-term strategy. Choosing the best course of action requires a clear view of the trade-offs.

Switching some money from stocks or bonds into cash might help you sleep at night and still allow you to enjoy the fruits of a stock and bond rebound.

Five-year CDs yield a trifling 2.29 percent, according to the BankingMyWay.com survey, while savings accounts pay just 0.26 percent and money markets 0.52 percent. All three holdings are down slightly over the past week.

On the other hand, these are safe places to stash your cash. Except for some damage from inflation, you can be confident you won’t lose money. With stocks and bonds you just don’t know whether the future will bring a stunning rebound or another round of gut-wrenching losses.

Long-term investors have generally been advised to spread their money among stocks, bonds and cash according to their time horizons and stomach for risk.

Stocks are the riskiest holdings, but also the most generous over long periods, with returns averaging about 10 percent a year in the 20th century, compared to 5 percent for bonds and three percent for cash.

According to one rule of thumb, an investor should have enough cash for six to 12 months’ expenses, while bond holdings should equal one’s age converted to a percentage. The rest should be in stocks.

A 40-year-old might therefore have 10 percent of his portfolio in cash, 40 percent in bonds and 50 percent in stocks.
If returns match the 20th Century averages, every $100 divided this way would grow to $208 after 10 years.

But what if you lose your job, or what if the stock market will take another dive? A bigger cash cushion might put your mind at rest, but what would you give up if stocks and bonds advance at a normal pace?

Suppose you doubled your cash holdings to 20 percent of your portfolio by reducing the stock portion to 40 percent. With the same average long-term market performance, your $100 would grow to $196 over 10 years, only $12 less than if you’d stuck with the riskier portfolio.

That’s not a big sacrifice for peace of mind. Of course, a bigger cash holding would weaken your returns if stocks really took off, but with 40 percent still in stocks, you’d do pretty well.

You can play with the figures using the Savings Taxes & Inflation calculator. To keep it simple, assume a total portfolio of $100, and play with various return combinations, time periods and asset allocations. For starters, put zero in the inflation box, but also look at what would happen if inflation stayed at the long-term average of around 3 percent.
Whatever you settle on for cash reserves, use the BankingMyWay.com search tool to find the best yields on CDs, savings,  and money market accounts.

Some of the big banks like JPMorgan Chase (Stock Quote: JPM) and SunTrust (Stock Quote: STI) have CDs that beat the national averages, but be sure to check out your local banks as well.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.