MORE THAN

the occasional

stock tip

or can't-miss fund play, what most investors need is a lesson in strategic thinking. For those of us who truly love the investing game, even something as seemingly mundane as saving can be approached with a strategic and artful eye. While it's certainly not as sexy as writing option premiums or selling stocks short, using a disciplined approach to cash management is a smart, low-risk way to squeeze some extra yield out of your dollars. As we mentioned

last week

, the big banks all work hard to pound every penny; so should you.

Whether you're a huge institution or a small-time saver, cash management should always provide, above all, adequate liquidity. Fund managers need cash to make purchases as well as meet redemptions. Individual investors also put money to work, and most certainly have regular bills that must be paid. Some liquidity needs, such as buying a house, can be anticipated. Others, like totaling your car or getting sick, just seem to pop up out of thin air.

In one form or another, most investors use demand deposit accounts, aptly named because funds can be withdrawn at any time without prior notice. Checking, saving and brokerage sweep accounts are all demand deposits, giving you instant access to your funds through any number of means, be it wire, check or ATM.

Of course, in exchange for liquidity, yield is sacrificed. And because demand deposits usually feature the lowest possible rates, to boost return you've got to lock up cash for longer periods of time. Thus is the challenge of cash management: balancing the need for liquidity with your existing portfolio and expectations for interest rates.

Call me old fashioned, but for most small savers, I still think certificates of deposit are the best option. Insured by the FDIC, they pay a fixed rate over a maturity of anywhere from one month to 10 years or more. Because of the penalties and lack of a liquid secondary market, CDs are generally held to maturity. Personally, I've always found this to be a hidden benefit. Buying a CD essentially locks your money up, and it's a lot harder to spend cash when you don't have such ready access.

Just like bonds, the yield on CDs changes over time to reflect prevailing interest rates. If you find forecasting the stock market difficult, be forewarned: Getting a bead on interest rates can be downright impossible. Look no further than the past few months, a period in which rates were widely anticipated to rise. They've actually gone down, confounding economists and savers alike.

While I have a few ideas on the subject, what's next for rates is really anybody's guess. Rates could rise, or they could fall, or they could do both, or neither. Ever wonder why the size of Greenspan's briefcase causes so much consternation? In the market, uncertainty is the norm. Nobody knows what's going to happen.

But as I always like to point out, it's technique, and not prognostication, that ultimately predicates success. Good technique doesn't keep you from being wrong, but from being wrong in a big ugly way. When it comes to cash management, that means achieving above-average returns even without having to always be right on the next direction for interest rates. To that end, there are three basic strategies to know: the ladder, the barbell and the bullet.

The laddered approach involves buying CDs that mature each year over a stated number of years, putting an equal amount of capital in each. So instead of investing $25,000 in one CD, a portfolio manager would put $5,000 into five separate CDs, from one to five years in length, with each investment forming a "rung" on the ladder. As the shorter-term deposits mature, they are reinvested for another five years. The approach offers the high yields of longer-dated maturities, while keeping a portion of the money available within a relatively short period of time.

Although the strategy doesn't eliminate interest-rate risk, it helps mitigate it. If rates rise, funds are reinvested at the higher rate. Should rates fall, proceeds from maturing CDs are invested at lower rates, yet the bulk of the portfolio's yield doesn't change. It's akin to a dollar-cost averaging technique used in the equity market.

One of the elements that makes laddering so successful is that it turns savings into an ongoing, habitiualized process rather than a one-shot deal. Moreover, because funds regularly need to be reinvested, it tends to keep one quite knowledgeable as to the direction of interest rates. I personally find maintaining a ladder quite comforting. There's something uniquely reassuring about the notion that you've got savings maturing every year until, say, 2009.

The barbell strategy is named for the shape it creates on a chart of maturities large investments in short- and long-term CDs, with no securities in between. So on a $25,000 portfolio, for example, $12,500 might go into a six-month CD and $12,500 into a five-year CD. The short-term investment provides the liquidity, while the long-term maturities provide the majority of the yield. The net effect is to create an intermediate-term return with considerably more flexibility, as the short-term investments allow adaptation to market conditions as they change.

Generally speaking, the barbell approach is more suited to aggressive investors with a specific outlook on interest rates. For example, should yields rise after a barbell is established, the proceeds from short-term CDs could go into longer-term ones, essentially shifting to the ladder strategy. Should rates fall, proceeds could be reinvested back into six-month CDs for a shorter duration. Barbells are most successful when the yield curve flattens, or when long-term yields drop and short-term yields rise.

Because the long-dated CDs will eventually become intermediate- and short-term CDs, I find the barbell serves as an ideal way to start putting money to work while maintaining maximum flexibility to respond to rates as they change. If you're anxious to improve your savings yields but don't want to commit to tying up all your capital, the barbell can be a smart way to begin.

A final strategy is a bullet, which involves buying several bonds over a period of time that all mature on or near the same date. So with $25,000, for example, $8,000 might go into a three-year CD today, $8,000 into a two-year CD next year and the final $8,000 into a one-year CD in two years. The entire portfolio will mature at the same time, and the interest-rate risk was lessened by staggering the intervals at which the money was put to work.

From a practical standpoint, the bullet is useful when you anticipate a need for large liquidity at a future date, but want to improve the return a bit until that time. It's most profitable when the yield curves steepens, or when long-term yields rise and short-term yields fall. This allows the investment of cash at higher rates as the target maturity date comes closer.

No matter which cash-management strategy you employ, use Smartmoney.com's Living Yield Curve to plan your approach. This handy application organizes more than 27 years' worth of interest-rate data in an intuitive interface that makes research and planning a breeze.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.