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Money Market Funds Comeback With Mark Biller

MoneyWise | Nov 15, 2022

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Show Notes

This year saw the stock market go from a rocket launch to a rollercoaster ride, and many investors have decided to climb off. If you pulled out of the market before your portfolio could “crash and burn,” you needed a place to put your money. Today I’ll talk to Mark Biller about an option you may want to consider: money market funds.

Mark Biller is the executive editor at Sound Mind Investing.

  • Money market funds haven’t been too popular in recent years. But SMI has an article in its latest newsletter about how that’s changing.
  • There are a few common reasons why people find themselves with a decent amount of cash looking for a home. One is when a person completes their 3-6 month emergency savings goal and is looking for the best place to store that cash safely. Another is when an investor either takes money out of the market temporarily or has money to invest that they haven’t put to work yet.
  • Whatever the reason or purpose of the cash holding, one old option that has largely been abandoned over the past decade is back in play with today’s higher interest rates — the money-market mutual fund.
  • THE RETURN OF THE MONEY-MARKET FUND
  • A money market fund is simply a specific type of mutual fund that invests in very short-term, very safe debt issued by the government, and in some cases large banks and corporations, depending on the type of money market fund. In either case, because the debt is so short-term and issued by really solid sources, the risk in a money market fund is extremely low, while rates tend to be higher than what most banks typically pay on their savings accounts.
  • Money-market funds aren’t new - they’ve been around for roughly half a century. And for most of that time, they’ve been an excellent option for safe cash holdings. But that changed in 2008.
  • Following the global financial crisis in 2008, the Federal Reserve lowered short-term interest rates to almost zero and left them there for a decade. When there’s no yield to be found anywhere, the extra step of using a money market fund doesn’t make sense, so people quit using them.
  • But with short-term rates now up near 4%, money-market funds are back in the game, and investors are paying attention. In recent months, total net assets invested in MMFs have surged.
  • WHEN RATES ARE RISING …
  • MMFs are appealing on the one hand because they are paying higher rates now, but they’re also particularly good when rates are continuing to rise.
  • MMFs tend to reflect interest-rate changes quickly because the short-term loans that make up their portfolio are constantly being repaid and new loans issued. So for example, last month’s 3.5% loan is replaced by today’s 4% loan, which can then be replaced by a 4.5% loan two weeks from now. That makes them perfect for a period of rising rates like we’ve had this year.
  • Now it’s important to point out that while MMFs are great for their specific job — which is storing a person’s liquid cash — they’re not a good choice for growing your capital over the long term. These are an alternative for savings accounts, NOT investment accounts, unless they’re being used within an investment account to store a person’s temporary cash.
  • Good distinction there. Now, of course, money market funds aren’t the only option for parking short-term money. So why might someone want to use, say, an online savings account vs. a MMF vs. a bond fund?
  • MONEY-MARKET FUNDS VS ALTERNATIVES
  • A lot of it comes down to what a person has convenient access to, along with what the purpose of that money is.
  • An online savings account can be a great, super easy way for people to manage excess cash in their bank account. For example, a person might have their paycheck directly deposited into a checking account at their local bank. But their local bank likely is paying next to nothing on their savings accounts, so a person can easily find an online bank, like Capital One or many others, that is paying much better yields on their savings accounts. A few keystrokes can move money back and forth between their local checking and their online savings while picking up a few extra percent in yield. Most online savings accounts are also FDIC insured, whereas money market funds are not, so that’s an important detail as well.
  • Money Market Funds can also be used in this way, but they also have one other very helpful use — they can be bought within most investment accounts as well. So for example, when SMI told its members to sell certain stock funds earlier this year and move those holdings to cash, it would have been easy for SMI members to sell the old fund and buy an MMF. They could do that right there within their IRA or another investment account, just like they would buy or sell any other mutual fund.
  • Bond funds are a little different story. Bank savings accounts and money market funds are very similar in terms of the level of risk being taken. Bond funds include a much broader universe of investments that can range from super safe - like bank savings or money market funds - all the way out to super risky. So it’s critical to understand what exactly you’re getting when you buy a “bond fund.” What we’re saying is all bond funds aren’t created equal - there’s a huge amount of variety between different types of bond funds.
  • That’s not a bad thing, by the way. The fact that there are all different types of bond funds means they can be used for lots of different purposes, including as a core holding within a person’s long-term investment portfolio. You just have to be sure you’re buying the right type of bond fund for the specific purpose that you need. That’s the type of thing Sound Mind Investing deciphers and explains for its newsletter members every month.
  • You can read more about MMFs in their article, “Money-Market Funds Resume Role as Solid Option for Short-Term Cash” at SoundMindInvesting.com.

On this program, Rob also answers listener questions:

  • Are you able to put money into an IRA in the name of a young adult relative?
  • How do you navigate concerns with allowing family to help you financially?

Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to Questions@MoneyWise.org. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app.

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