Yesterday's USA Today featured an article entitled, "3 Good Reasons to Park Money in a Money Fund. Columnist John Waggoner writes, "Cash isn't trash. Now, you may point out -- correctly -- that the interest from a money market fund wouldn't feed a family of gnats, and you'd be correct. The average money fund yields 0.02%, which would generate a fully taxable $2 in interest on a $10,000 balance, the remainder of which would be overwhelmed by inflation. All true. But there are three good reasons to park money in a money fund, or a bank money market account." He continues, "You need to write a check. This may seem obvious, but if you have money you need to spend within the next year, you should have it in cash. As anyone who was in the stock market in 2008 knows, you can easily lose 20% or more in a 12-month period in stocks.... If you have a tuition bill to pay, or a major purchase, you shouldn't let the capital markets determine whether or not you can make the payment. You can't sleep at night. In theory, the longer you have before you'll need to spend your money, the more money you should have in stocks.... During most 10-year periods, you'll earn more in stocks than you would in bonds or cash. During all 20-year periods, the stock market will beat all alternatives. And that's fine in theory. Some people can sock away money in the stock market and be blithely unaffected when their account plunged 45% or more. You may not be one of those people. And it's better to hold some cash as a buffer, if that's what keeps you from panicking when the market swoons. You want to buy when the market is cheap. The best financial position in the world is to be liquid when no one else is. If you'd had plenty of cash on hand in 2009, you could have snapped up stocks (and real estate, for that matter) at thrift-store prices. You just had to have had the cash on hand. Most people didn't. Big buying opportunities don't happen often, but when they do, they're fabulously lucrative.... All you need is the cash on hand." Waggoner adds, "The general definition of cash is "any investment that can be swiftly converted to cash." For most investors, that means a money market fund. Most money funds will allow you to write checks on them, just as you would a bank account. And you can use your brokerage account's money fund to buy stocks, bonds or mutual funds nearly instantly. Money funds are mutual funds that invest in highly liquid, high-quality securities, such as Treasury bills and jumbo bank CDs. They can't promise you a particular yield: They simply distribute what they get equally among shareholders. Cash has one additional virtue. Short-term interest rates have been near zero since late 2008 -- an unprecedented period of extraordinarily low rates. If you were to bet on one investment rising in value in the next two years, money funds would be the safest bet."
