Use access key #2 to skip to page content.

Money Market Fund—Am I Making a Mistake?



November 25, 2014 – Comments (6)

I am, perhaps, a decade away from retirement. Financial planning info I read says that I should be 40-60% in fixed income securities, depending on whom you read. Thanks to the Fed, however, interest rates are practically zero. This poses a problem for me.

Bank CDs and money market funds are yielding so low, that they are slowly losing to inflation. I could go for a bond fund, but the duration means that when interest rates start to rise, the NAV will go down. Stuck between a rock and hard place, I suppose.

I have decided to simply leave them in a money market fund. That way, when interest rates rise, the fixed income part of my portfolio is safe. I have zero risk, but also almost 0% return. If you have thoughts about this, please let me know in the response box below.


6 Comments – Post Your Own

#1) On November 25, 2014 at 1:15 PM, valunvesthere (22.96) wrote:

It is recommended that at earlier age it's best to take more risks in investing because we have decades to build wealth or recuperate. As we grow closer to retirement it's recommended to preserve wealth and take less risk in investing because we have less time to build wealth or recuperate.

I have no solution for anyone because everyone is different and this subject should be dealt on case by case basis by qualified financial planners for further individual review.

The adage, "No risk, no reward" and "no pain, no gain" applies here.

Good Luck. 

Report this comment
#2) On November 25, 2014 at 1:26 PM, constructive (99.96) wrote:

It's true that bonds aren't very attractive right now. But I doubt that interest rates will rise fast enough, over say the next 5 years, that money market funds will beat bonds.  The average bond fund duration is about 5.5, which means that for every 1% interest rates rise, the fund will lose 5.5%.

Report this comment
#3) On November 26, 2014 at 9:45 AM, anne2013 (< 20) wrote:

i have been doing basically the same thing but thought that perhaps i would put a percentage in bonds and then pick dividend yielding stocks for income.  

Report this comment
#4) On November 26, 2014 at 11:32 AM, jiltin (44.96) wrote:

I have exactly 10 years to retire (hoping so).

Since interest rate is century low and historic, make use of fixed mortgage at low rate. 

I moved my investments (fixed portion) to real estate with 3.5% and 3.75% interest rate. I do not go for ARM, rather fixed 30 year. Purchased properties at 20% down, but now the LTV is 50%. Purchased one home every four years. This is exactly my fixed (bond side) investment. This is 70% of investment.

Rest cash side, I invested in stocks almost 30% of investment.






Report this comment
#5) On November 27, 2014 at 10:00 AM, rd80 (94.78) wrote:

I'm in a similar situation, just turned 56 and trying to set my portfolio up to generate the income I'll need to retire in ten or so years.

I'd like to be able to do it with a bigger bond allocation, but am way overweight stocks compared to most planning rules of thumb.  If I were going to move more to bonds, I'd look to stuff hanging on the edge of investment grade; treasuries and high grade corporates simply don't pay enough to make sense.  Another area I haven't spent much time looking where I probably should is preferred stocks - despite the name, they're more like bonds than stocks - but, companies can slash the payouts far easier than with bonds.

As far as building cash, I'm trying to do that too, but the reasoning has nothing to do with the markets.  We had to dip into savings to cover some home repairs and projects this year, so we need to replenish that.  And, I'm targeting a cash reserve of somewhere near a year's worth of living expenses before retiring to have a big cushion to avoid having to sell down investments to cover unforeseen stuff.  Time will tell if we make that goal.

Mind sharing why you're using a money market and which one?  Cash accounts aren't paying much, but when I've looked for the best rates on savings over the past few years, they've always been with a bank or SallieMae savings account.  We're using a Voya, formerly ING, savings account.  Current rate there is 0.75%.  Not much, but better than any money market account I've found and is FDIC insured, which isn't the case with most money markets.

Report this comment
#6) On November 27, 2014 at 10:35 AM, rd80 (94.78) wrote:

Correction to my comment above.  The savings account is with Capital One 360, not Voya. 

And, here's Bankrate's list of the top yielding savings and money market accounts in case anyone's interested.

Report this comment

Featured Broker Partners