The Vanguard Group features money funds its latest "In the Vanguard" newsletter, with the article, "Stability for yield: A fair trade?" The feature, in Vanguard's well-timed contrarian tradition, discusses why money funds are appropriate even with almost no yields. It says, "Last year was tough for investors. This year, it's savers who are having trouble."
Vanguard asks, "What's behind the falling payments? To revive the economy, the U.S. Federal Reserve has slashed short-term interest rates, which in turn affects yields for money market funds and bank savings products. Until the Fed changes this policy, you can expect yields to remain extremely low."
The piece quotes David Glocke, who oversees Vanguard's taxable money market funds, "`Throughout the industry, yields on money market funds are near zero. Despite Vanguard's low costs, we're not immune from the overall trend." Vanguard warns, "Undeniably, low yields are disappointing, but they don't necessarily mean you should trade in your vehicle. Your needs and goals, not the current interest rate environment, are what should drive your decision."
"The important thing is to put into perspective what you need this money for," says Vanguard's `John Juliano. "Sometimes, the yield is not the primary concern; the safety of your money is the primary concern.... [T]he upside is, you might get more yield, but the downside is that you'll see more price fluctuation."
It continues, "Traditional investment guidelines call for using cash investments such as money market funds only for short-term goals.... You could get a higher yield for your savings by swapping into a bond fund with a long duration, but you'd also assume greater risk. Say you bought a bond fund with a duration of ten years. With every percentage-point increase in interest rates, the price of that fund could be expected to drop by about 10%, easily wiping out the benefit from the higher yield."
Finally, they conclude, "Ultimately, you may decide that higher yields aren't worth the trade-off with higher risks and that trading in that stable, low-yielding money market fund isn't such a good idea after all."
