My leaky roof is no concern to me,
the sun is shining
“Hey Dad,” Daughter #1 writes, “What is up with Money Markets right now? I have heard something about them being riskier than before. Most of our IRAs and 401Ks are in Money Market now. Is there a better choice?”
Good question. Money market funds are designed to serve two purposes: preservation of capital and liquidity. The funds’ assets are short term loans to governments and institutions. The loans, commonly known as commercial paper, have maturities of thirty to one hundred days. With maturities this short, there is little if any price fluctuation, and the fund can refrain from reinvesting the proceeds of maturing loans to allow cash to come into the portfolio to meet the liquidity requirements of investors.
The higher the quality of the commercial paper, the safer the fund. As is normal, the higher the quality of the fund, the lower the fund’s yield. Because Cindy and I want maximum capital preservation and maximum liquidity, we accept lower yields. These days, that means practically no yield.
That’s OK with us because we are holding these funds to reinvest in stocks at a market low. That low promises to come during a systemic failure in the financial markets. During a period like that, anything with even a whiff of risk will cause problems for the investor.
Money market investors got a big scare in 2008 when one of the riskier funds had a series of defaults in the fund and stopped cash redemptions to their investors. This caused a panic throughout the money market industry, with thousands of investors staging a run on their funds. For the most part, the mutual fund companies met the rush of redemptions with their own capital. Next time might not be so easy. I want to be prepared for total panic in the next crash.
The best option is to buy 90 and 180 day Treasury bills through a brokerage account. This is usually not an option for 401k accounts, which is the case for Cindy’s 401k. I reviewed the portfolio of her money market fund a couple of years ago, looking for an aggregate rating on the paper of P1.5 (Google FRB Commercial Paper Ratings for info). I felt it was OK then, but will look at it again. We may transfer a part of that account to an IRA she has at Vanguard so she can buy Treasuries.
The SEC has just established some new rules in an attempt to “protect” money market investors in the event of a systemic breakdown in the markets. They include requiring a 10 day delay for redemptions and a 2% redemption charge. That’s not even a half-way good idea. Restricting my liquidity just when I want the access to switch to stocks is exactly what I don’t want. And, forget about a redemption charge.
Obviously, the time to insure our liquidity is now, before things get dicey.
No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.