SECTION IV: INVESTMENTS

Cash Equivalents

A cash equivalent can be defined as any security with a maturity of one year or less that can be converted to cash quickly because it is highly liquid and considered to have virtually no principal risk. Inflation is the greatest risk to cash equivalents. Money can lose purchasing power if inflation is occurring at a rate higher than the rate the cash equivalent is earning.

To illustrate, consider a savings account earning 2 percent, where inflation is 3 percent. The money in the saving account is not keeping pace with the rise in the cost of goods and services. Therefore, the money in the savings account is losing purchasing power. Over time, the loss of purchasing power could have a negative effect on an investor's lifestyle. Examples of a cash equivalent are Money Market Funds and Saving Accounts. Due to the simplicity of cash equivalents, this section only gives a briefing on their features.

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