• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
MENUMENU
  • Home
  • About Us
    • Our Philosophy
    • Choosing a Financial Planner
    • Legal and Regulatory
    • Team
    • Careers
    • Awards & Recognition
    • Contact Us
  • Our Services
    • Financial Planning
    • Ongoing Financial Guidance
    • Portfolio Management
  • Financial Planning Basics
    • Continuing Care Retirement Communities (CCRCs)
    • Retirement Planning and Cash Flow
    • Social Security
    • Taxes
    • Insurance & Risk Management
    • Investments
    • 401(k)
    • Real Estate
    • College
    • Liquidity
    • Divorce
    • Estate Planning
    • Sensible Updates
  • Resources
    • Blog
    • Financial Planning for Older Adults
    • Webinars
    • Videos
    • Financial Planning Guidebook
    • Continuing Care Retirement Communities Guidebook
    • Primers
    • Financial Planning Links
    • Client Login
  • Contact Us
Sensible Financial Planning

Sensible Financial Planning

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
Client Login

Call Us Today
781-642-0890

Money Market Funds are not FDIC insured!

by
Rick Miller
Ph.D., CFP® - Founder

August 18, 2012

Gretchen Morgenson is very interested in the SEC’s proposal to regulate money market funds. All of us should be.

Many consumers expect to earn interest in money market funds without losing money just as they can in interest-bearing checking accounts. In 2008 when the Reserve Primary Fund “broke the buck” (declined below $1 per share – lost money), people raced to take their money out of all money market funds, not just the Reserve Primary Fund.

Money market funds invest in short-maturity bonds, both “commercial paper” (corporate bonds) and US government bonds. Tax-free money market funds invest in short-term municipal bonds. All bonds have default risk – their issuers might be unable to pay principal and interest. Therefore, all of the funds risk losing money.

Someone must bear that risk. By pegging the share price at $1, fund managers have seemed to promise that shareholders won’t. The run for the exits in 2008 shows that shareholders wanted to believe the message, but knew that the fund managers weren’t really bearing the risk either. The Federal Reserve stepped in to guarantee money-market deposits – taxpayers became the risk bearers.

Now the SEC suggests that money market fund share prices should float, just as other mutual fund share prices do. This would eliminate the implicit guarantee – shareholders would immediately understand that their dollars are at risk. Alternatively, says the SEC proposal, money market funds would have to hold a capital cushion to make up for potential losses.

Mutual fund companies think that both of these are terrible ideas. They argue that shareholders will be less willing to invest in money market funds if they believe they might lose money (share prices could float), and that holding a capital cushion will depress returns, making the funds less attractive to investors.

Both arguments are almost certainly correct. However, both ideas are terrific.

Floating money market fund share prices will cause shareholders to believe they might lose money. Shareholders should believe that. They very well might lose money. Investors should be appropriately cautious with their investments.

Requiring money market funds to hold a capital cushion will depress returns, and will make them less attractive to investors. This step will force money market funds to more accurately represent the net returns available from their underlying bond investments. That is, the net returns will be lower because they will incorporate the bond default risk cost, visible for investors to see.

I can understand that money market fund managers would far rather have taxpayers guarantee principal values to shareholders, and I can understand that shareholders would, too.

However, transferring resources from taxpayers to shareholders (and to mutual fund companies, who will enjoy larger profits from larger money market funds) is not good policy. Shareholders are investors, and investors tend to be wealthier than the average taxpayer.

The bank bailouts of 2008 socialized losses and privatized gains in this very same way. Taxpayers (Main Street) were very unhappy while bankers (Wall Street) were thrilled. How soon we forget.

More articles by Rick Miller Filed Under: Investments Tagged With: Money Market

Primary Sidebar

Sign up for our newsletter

Recent Posts

The picture shows a college campus and students because the article is about FAFSA.

The FAFSA Simplification Act and Financial Aid

The FAFSA Simplification Act makes adjustments to the FAFSA. How will it affect your college student and their financial aid?

The picture shows an older couple hiking on a beautiful day to represent retirement and the SECURE Act.

The SECURE Act 2.0 and Retirement

The SECURE Act 2.0 builds on the initial SECURE Act of 2019, changing the retirement planning space, and increasing retirement flexibility.

Categories

  • College Planning
  • Cybersecurity
  • Estate Planning
  • Financial Planning Basics
  • Financial Planning Videos
  • Insurance & Risk Management
  • Investments
  • Retirement Planning and Cash Flow
  • Sensible Updates

Topics

401(k) Annuities bond returns Bonds Charitable Giving College Planning Company Updates Credit Health Disability Insurance diversification Divorce Donor Advised Funds Economy estate planning Federal Reserve Financial Goals Financial IQ financial planning Financial Strategy Forbes.com housing inflation Investments Investment Strategy IRA Legislation Liquidity Long-Term Care Medicare Mortgage Older Adult Living Recommended Books remote work Retirement Choices retirement planning Retirement Savings Risk Management Securities Social Security Social Security benefits Staff News Stock Market Stocks sustainable portfolios taxes

authors

Rick Miller
Sensible Staff
Frank Napolitano
Rick Fine
Josh Trubow
Chris Andrysiak
Marie St. Clare
Laura Williams
Gyb Spilsbury
Chuck Luce
Aimee Plouffe Polley

Footer

Services

  • Financial Planning
  • Financial Guidance
  • Portfolio Management

About Us

  • Our Philosophy
  • Team

Resources

  • Blog
  • Financial Planning Guidebook
Sign up for our Newsletter
Awards & Recognition

Follow Us

  • Facebook
  • LinkedIn
  • Twitter

Locations

Massachusetts

203 Crescent Street, Suite 404

Waltham, MA 02453

Phone: (781) 642-0890
Fax: (781) 810-4830

 

California

600 B Street, Suite 300

San Diego, CA 92101

Phone: (619) 573-4131​

Disclaimer

This content reflects the opinions of Sensible Financial®. We may change it at any time without notice. We provide this content for informational purposes only. Although we endeavor to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. We do not intend the information contained in this website as investment advice and we do not recommend that you buy or sell any security. We do not guarantee that our statements, opinions or forecasts will prove to be correct. Past performance does not guarantee future results. You cannot invest directly in any index. If you attempt to mimic the performance of an index, you will incur fees and expenses which will reduce returns. All investing involves risk. You can lose any money you invest. There is no guarantee that any investment plan or strategy will succeed.

More important additional information and full disclaimer.

Copyright © 2023 Sensible Financial · All Rights Are Reserved
Legal Disclosure