MMFs as Safe Harbors
CNN Money writes, "Bubble Fears: Is it Time to Consider a Rainy Day Fund?." It says, "It's been mostly sunny on Wall Street for six years now as stocks have soared. But some investors are worried that the next rainy day could come soon. Stocks are pricey, we haven't had a correction in years, and America's central bank -- the Federal Reserve -- could shake things up in September. One place to weather the storm is a money market fund. It's considered one of the surest investments available, outside of stashing your cash in a bank account. Here's how it works: You put your cash into a fund, and the fund manager invests some of it in relatively safe bets: U.S. government bonds, corporate debt or municipal debt. The goal is to get people a better bang for their buck than just putting their money into a savings account, but keep the risk low -- far lower than investing in stocks or even most bond funds. "It often serves as a surrogate to a bank account," says Tim Huyck, Fidelity's chief investment officer of money markets. Most people invest in a money market fund for a few months, often to try to beat the interest you get on a bank account." It continues, "Money market funds, often called "money funds," could stand to win big from a Fed rate hike, which many believe will happen in September. "Money market funds become a nice alternative during these times," says Esther Chance, senior portfolio manager at Invesco, which manages $68 billion in money market funds. After a Fed rate hike, money market funds "definitely stand to win." A rate hike would do two things. First, it sometimes disrupts the momentum in the stock market, spooking investors to put money in safer assets. Second, it would bump up the interest that investors earn on their savings and bonds. Since the Fed put interest rates at near zero in 2008, money funds and bank accounts basically have given you the same return -- nothing. But historically, when rates are higher -- like they're expected to go this year -- money funds have higher returns than your average savings account." It continues, "Over $2.6 trillion is invested in money market funds in the United States. That's down from recent highs during the recession, but it's still almost 50% higher than 15 years ago, according to data from Morningstar and Investment Company Institute. The growth is impressive considering that over the same time span, there are half as many money market funds today as there were in 2000. Money funds have consolidated over the years into a few mega-powers players, like Fidelity and Vanguard. New rules that arrive in 2016 could change the game too."
