Money market funds may carry less risk than stocks, but investing in them as a reaction to market volatility also carries risk: You could miss out on any potential gains when the market begins to recover.
Meet the Money Market
Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a value of $1 per share.
Investors may use money market funds on a temporary basis to hold proceeds from the sale of assets while they determine where to reinvest the funds. Because money market funds aim to maintain liquidity and may offer higher yields than bank savings accounts, they can also provide a place to hold your emergency fund. It’s always a good idea to have enough cash saved to carry you through a financial emergency.
Less Risk May Mean Low Returns
Money market funds may have a place in your portfolio, but it’s usually not a good idea to keep the bulk of your wealth in low-yielding cash instruments because you are concerned about market volatility. As you can see in the chart, trying to choose the appropriate moment to flee or reinvest in stocks can be a costly practice that may cause you to miss out on market gains.
Low rates of return may also make money market funds less ideal for long-term investing. Any time the after-tax yield is lower than the rate of inflation, your investment may be losing purchasing power.
When considering money market funds, it’s important to remember that lower risk usually translates to lower returns. Before you invest in money market funds, be sure to evaluate whether or not they may help you reach your long-term goals.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your inv
Image via WikipediaMutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your Naperville financial services professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) The New York Times, January 10, 2009
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville Accounting firm. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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