MONEY MARKET FUNDS

When the risk of loss is high in the stock market, we instruct our clients to sell stocks and to purchase money market funds.  We prefer to be in stocks most of the time, but money market funds are our preferred “safe haven” in bear markets. 

Money market funds are funds that invest in short-term debt securities.  Most money market funds invest in treasury bills (short-term US government debt), commercial paper (short-term corporate debt), or municipal debt (short-term local government debt).

The main advantages of investing in money market funds are their safety and liquidity. 

Low Risk

Money market funds are required to invest in only the highest quality short-term debt instruments.  In addition, the average maturity of the debt in money market funds is 60 days or less.  Most money market funds invest in US treasury bills with durations of 90 days or less.  The money market funds that invest in corporate debt (commercial paper) are only allowed to invest in the short-term debt highest quality companies.

Liquidity

In addition to being low-risk, money market funds are highly liquid.  You can sell or buy money market funds at any time.  There is no lock up period like you have with Certificates of Deposit. 

Like other mutual funds, purchases and sales of money market funds only happen once per day at the close of business.

Income

You own money market funds for the income (interest) that they provide.  Money market funds do not generate capital gains. 

The interest income generated by money market funds follows the current interest rates of the short-term debt markets.  For example, as of this writing (February 2025), a US government money market fund is paying about 4.1% interest. 

The current interest rates are higher than average given the current inflation situation.  In the long-term, I would only expect to earn 2% to 2.5% interest from money market funds as inflation and interest rates move lower. 

Disadvantages

Money market funds are not long-term investments that will generate significant growth.  Money market funds can only be expected to keep up with inflation, so money market funds are not recommended as a core holding for retirement investment accounts. 

For retirement investment accounts, money market funds should only be used as a cash management tool for people in retirement and a safe place to park money when the risk of loss is high.

Money Market Funds in 401K Plans

Most 401K plans only offer a specialized version of a money market fund.  These are typically called Guaranteed Income funds or Stable Value funds in 401K plans.

These versions are money market funds, but they come with an insurance component to guarantee against any loss of principal. Because Guaranteed Income funds and Stable Value funds carry these insurance policies, they offer lower returns (interest rates) than your standard money market fund.  Currently, these insured money market funds offer interest rates of roughly 2% or about half the rate of traditional money market funds.

Unlike 401K plans, IRA accounts have access to the higher interest rate money market funds.  This is another reason why I recommend that people rollover their 401K plans into an IRA account as early as possible.

Money Market Funds vs. Bonds

Bonds are used as a long-term investment vehicle by many risk-averse investors.  When people invest in bonds, they are typically investing in intermediate term bonds or long term bonds.  Intermediate term bonds have maturities in the 5 to 10 year range while long term bonds carry maturities of 15 years or more. 

Typically, the longer the maturity of the bond, the higher the interest rate.  Here is a current comparison of the rates of US debt of varying maturities.

3 month Treasury bills                4.2%

10 year Treasury bond                4.5%

20 year Treasury bond                4.75%

Unlike short-term treasury bills, however, longer term bonds can and do lose money in the form of lower prices for the bonds.  This is what happened in 2022 and even now in 2025 longer term bonds have not recovered their losses from 2022. 

This is why I don’t like bonds and is another reason why I recommend parking money in money market funds to avoid losses in the stock market.

Stay Disciplined My Friends,

Phil

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Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.