What do you do when the yield on your money market account is essentially zero?
What is a money market fund and what is it for? A money market is a place for you to park short-term cash. That is, cash you’ll need sooner, not later.
The investments inside the money market are not magic. The “ingredients” of a money market fund will likely be very short term Treasury bills. These bills will typically mature within twelve months or less, and many of them sooner than twelve months.
In fact, SEC rules dictate that most of the investments found in a money market fund must mature within 60 to 90 days. If you peek under the hood, it’s also possible you’ll find other financial instruments like bankers acceptances, commercial paper and other notes that come due in ninety days or less.
This is what a friend told me just today:
“I started with a money market at Ally Bank a year ago. I think I was earning 1.4%.
And every month I get an email telling me the yield will be lower. Now I think I am down to 0.3%”
That sounds about right. Take a look at what treasury bills (T-bills) are yielding at the present time. That will give you an indication of what to expect in yield from a money market fund. Right now, as clients have heard us say, “you need a microscope to see a number that small.” As of October 8th, 2020, the current yield on treasury bills coming due in the next three months was 0.09.
You read that right. Oh, and that is the annual return, not the actual return. These yields get updated each business day, here. So, your bank or broker is not “screwing” you. They can only pay what the underlying investments yield, and pass that along to you.
And if you happen to find a money market yielding considerably more than others, do your homework. There is likely a catch.
Additionally, many banks, mutual funds and brokerage firms used to make money on their money market funds. These organizations would charge a management fee, and the fee was typically built in to the cost of the fund. That is not to say you would be charged a fee. Rather, the fee would be assessed on the assets before calculating your return. Many organizations at the present time are foregoing that fee, because the fee would otherwise gobble up the entire return.
Money Market Yields Nothing, Where Do I Invest?
If you like to feel comfortable having cash in the money market, but can’t stand the thought of earning nothing; you’re in a jam. Jason Zweig wrote a post in the Wall Street Journal this week, “Your Cash Earns Zip, Zilch, Nada. Don’t Make It Worse.”
Zweig wrote about some of the returns you may have encountered so far in 2020 if you took your “emergency funds” and invested them in the stock market. It’s not a recommended path. In most cases, the alternatives led to losses. Meaning, not only would you not earn a return, you would have less than you started with. And any interest or dividends earned would not be nearly enough to make you whole. You should pass.
By the way, the panicked folks we see when markets are heading lower are often the people who are “betting the rent.” Almost always, we discover — after the fact — they were investing (better explained, “trading”) money they should never have been trading.
We consistently tell clients at Mullooly Asset Management that cash parked in a money market should be money that will be needed (spent) in the the very near-term. Here are two examples using the “bucket” approach we talk about often with clients:
- If you are actively shopping for a house, that down payment should have been out of harm’s way a long time ago.
- If you have scheduled withdrawals as part of an income plan, the next three-six-twelve months of withdrawals (depending on your risk tolerance) should also be out of the market. Someone relying on that money cannot be taking chances on the market being up when the time comes for a check.
But what about a market crash?
Can’t we just “ride it out” by putting everything in the money market?”
We’ve unfortunately had this conversation more times lately than we care to admit. People are nervous, we understand that. Trashing your personal investment game plan or “ripping up the script” for a general election is a bad move. No matter the outcome, we (the US economy and markets) will go on. Brendan has an excellent post about market returns from Democrats and Republican administrations. Right now the media has done their job. nearly everyone is in a frenzy over this election. Think about that.
When you’re “hiding out” in the money market, you have to be right two times. First, you need to exit at the right point. Then, you need to gauge when to get reinvested. The second step is much harder than the first!
Please heed this message from someone who “tried” doing this several times early in my career. You will be wrong on either the exit or the re-entry. Or wrong on both sides.
And then you will often find yourself asking why you even bothered at all.
How much pain have cost us the evils which have never happened.
-Thomas Jefferson
An almost always better scenario is to “ratchet down the risk.” In other words, do you need to have 100% of your money invested in the market? Or should some portion of your investments go into a different bucket that might go up when the world is upside down? Or some other investment which might provide some alternative — or some income — while we wait for the “growth investments” to recover?
“Moving to cash” or trying to sidestep an event (like an election) is also something that should *never* be done in a taxable account – you will be forking over unnecessary capital gains. It should also *never* be done when paying commissions on trades. But brokers (who get paid on every trade) will never fight you on your decision to sell and buy back — they’ll get paid twice!
Whatever you will need in the short term should be out of the market and in a money market account. Work with a local financial advisor on the Jersey Shore and discuss your risk tolerance, your short and long-range plans and what ought to be invested where.
The nearby photo is what federal agents found in a box spring in Massachusetts and posted to their Twitter account back in 2017. We understand anti-money laundering prevented these folks from depositing it in the bank. At the very least, your money should not be invested here (in the box spring or the mattress).