Bottom Line Warns on Money Funds
Bottom Line Personal writes on "Money-Market Fund Danger" in its latest newsletter. The piece explains, "If you keep your cash in a money market mutual fund at a brokerage firm, it may not be as safe as you think. What they are: These funds typically invest in a mix of US government bonds and high-quality corporate debt. They became tremendously popular, growing assets more than 70% over the past five years to $5.2 trillion, because the risk of losing money was very low and the yields often were higher than those offered by ultra-safe bank products such as saving accounts and money market accounts, which are FDIC-insured." But the piece says, "As the coronavirus pandemic accelerated in the spring, sparking a sudden recession and widespread unemployment, panicky consumers it started draining their savings, including cashing out their money market funds. Some funds considered slowing redemptions by imposing an exit fee and/or preventing investors from selling their shares for a short time period.... The Federal Reserve -- fearing that brokerage funds would have to sell holdings at a loss to meet redemptions, saddling investors with losses -- staved off a potential crisis by backstopping the funds." Under, "What to do," they tell readers, "Although the risk of losing money is not high, the yields are so low now that it is not worth adding to or keeping money in a money market fund. Recently, large money market funds averaged an annual percentage yield of justice 0.12%. A year ago, the Fidelity Government Money Market fund yielded 1.8% but recently just 0.01%. Safer alternatives: For cash you plan to invest soon, most brokerage firms offer a federally insured 'cash sweep' account, where any cash from investment trades automatically goes. Your money may already be in a cash-sweep account, which recently yielded 0.01% at large brokerage firms such as Fidelity and Charles Schwab. They are safer than money-market funds. For longer-term savings, consider moving your cash to FDIC-insured money market account online banks, where recent years were much better -- as high as 1%."
