Randy,
My financial guy is suggesting a money market for a portion of my portfolio that we agree needs to be not only safe but accessible. Is this a good idea, or should I just put it into a CD or even a bank savings account?
It sounds like your advisor might be directing you to a money market fund, which should not be confused with a money market account.
A money market fund is a type of mutual fund that invests in cash equivalents (some examples of “cash equivalents:” CDs, commercial paper, money market funds, treasury-bills, and government bonds.) and short-term debt-based securities, which may include U.S. Treasury Bonds.
A money market account is a type of savings account, usually offered via banks, credit unions, etc. These accounts typically provide check-writing and debit card features to make withdrawals and transfers.
However, I do not believe this is the “Money Market” your “financial guy” is directing you to. It appears that he is suggesting the aforementioned money market fund.
Just for your edification, here are a few things to know about money market funds.
Safety
I certainly don’t know your precise risk tolerance (learn your risk score). However, since your goal with these assets is reportedly safety and accessibility, it seems a money market fund may be a good fit.
Money market funds (like their savings account namesake) are constructed to be easily accessible and are often considered cash equivalents. Their goal is to preserve capital while maintaining liquidity. In the financial world, they are sometimes used to hold cash for an investor while evaluating new investment options. The central benefit of money market funds lies in their stability and liquidity.
Risk
Unlike bank money market accounts (while the goal is still safety and liquidity), money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Though they seek to preserve the value of your investment, it is possible to lose money by investing in a money market fund.
“Breaking the Buck”
Breaking the buck is a term used to describe a money market fund’s net asset value dropping below $1. (Note – Money Market Funds are purchased at $1 per share.) This is potentially the most significant risk associated with money market funds. Just how much of a risk is this type of event?
To my knowledge, breaking the buck has only occurred twice since 1971 (when money market funds were introduced). It happened one time in 1994 when derivative losses by one fund caused a liquidation at 96 cents—the second time happened to a fund in 2008 because assets were held with Lehman Brothers, which went bankrupt.
However, since 2008, several SEC rule changes have made money market funds even safer. So, while they were relatively safe before 2008, breaking the buck is even less likely today.
Preservation of Capital
Money market funds can play an essential role in your portfolio. They may provide liquidity, along with being a relatively low-risk investment choice designed to preserve capital. They can play a significant role in managing an investment portfolio when liquidity and safety are required.
Please join us for our upcoming “Outside-the-Box” virtual lunch (sent to your home or office) and learn. Expect to discover exciting and potentially valuable knowledge (opportunities that may improve portfolio performance/mitigate risk) about little-used “Alternative Investments.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services, and its affiliates do not provide tax, legal, or accounting advice. This material is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com. Securities offered through Infinity Financial, member FINRA/SIPC. Investment Advisory Services are offered through Infinity Financial Services Advisory, an SEC Registered Investment Advisor.
