How risky are money market funds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
twistypencil
Posts: 24
Joined: Sat Feb 18, 2017 3:15 pm

How risky are money market funds?

Post by twistypencil »

With the churn in the market, and the uncertainty with rate hikes, I've been wondering a little bit how risky it is to have cash in a money market fund (like VUSXX). I have parked cash here that I plan to use for a down-payment on a house in the next 3-4 months, and it seemed like the best place to put things. My thinking was savings account interest is a joke, high yield savings accounts could get me better interest, if I chase it a bit and open new accounts and some of those places seem super risky... but a money market account, in vanguard, that is easy. I can transfer my cash from my savings account in there, and pick up VUSXX easily, and then I'm making a nice return until I need that cash, whereby I can easily cash that out and have access to it as quickly as I need it.

I started reading the prospectus for VUSXX to understand the risks, and that was helpful, but still quite a bit of it is a bit "above my pay grade" and so I thought I'd reach out to the hive mind of the bogleheads where I respect the fine folks here and what they have to say.

Lets say the market starts getting worse, and larger sell-offs start happening and we go into a recession, do I need to be checking the 7-day rate of the fund on a daily basis to make sure I'm not suddenly going to be losing money or something?

As a side note: these dollar tracking funds, where they try to keep things pegged to the dollar, sound like 'stable coins' in the crypto world, which makes me a little scared :)
gavinsiu
Posts: 702
Joined: Sun Nov 14, 2021 12:42 pm

Re: How risky are money market funds?

Post by gavinsiu »

Bank account are FDIC insured, so are safer than Money Market funds which do not hold such guarantee. Money market failure are really rare. I believe there was one fund that broke the buck in 94. In 2008, there was an issue with the Lehman Brotheres Reserve Fund. Even if there is a failure, there is tendency for the financial firm to absorb the loss, since breaking the buck on MM will cause a panic resulting in greater financial damage. However, you cannot count on this.

In general, for Money market, those that invest in Treasury are safer than the ones that invest in Muni or corporate.
User avatar
retired@50
Posts: 9141
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: How risky are money market funds?

Post by retired@50 »

I think you're safe in VUSXX.

It's as good as the treasury bills it holds. I didn't go as far as the prospectus, but just the general description on the Vanguard site is enough to assure me, but I'm not much of a worrier.
Vanguard - VUSXX Fund wrote: Product summary

Vanguard Treasury Money Market Fund, which invests primarily in U.S. Treasury securities, seeks to provide current income and preserve shareholders’ principal investment by maintaining a share price of $1. This fund at a minimum invests 80% of the assets in debt issued directly by the government in the form of Treasury bills and may invest in other securities including, but not limited to debt issued by federal agencies that are sponsored, guaranteed, or owned by the federal government. As a government money market fund, this fund is required to invest at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities). As such it is considered one of the most conservative investment options offered by Vanguard. Although the fund invests primarily in short-term U.S. Treasury bills, the amount of income that a shareholder may receive will be largely dependent on the current interest rate environment. Investors who have short-term savings goals and want the added security of investing in a fund in which the majority of the underlying securities are backed by the full faith and credit of the U.S. government may wish to consider this option.
The interest rate it pays can certainly change, but you shouldn't experience any losses. Just reduced interest payments, if the Federal Reserve drops the overnight Fed funds rate. Currently, it's getting raised, and is now in the 3% - 3.25% range. The 7-day SEC yield on the fund will track this Fed funds rate pretty closely, with about a 30 day lag.

Regards,
This is one person's opinion. Nothing more.
User avatar
ruralavalon
Posts: 23773
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: How risky are money market funds?

Post by ruralavalon »

twistypencil wrote: Thu Sep 22, 2022 5:16 pm With the churn in the market, and the uncertainty with rate hikes, I've been wondering a little bit how risky it is to have cash in a money market fund (like VUSXX). I have parked cash here that I plan to use for a down-payment on a house in the next 3-4 months, and it seemed like the best place to put things. My thinking was savings account interest is a joke, high yield savings accounts could get me better interest, if I chase it a bit and open new accounts and some of those places seem super risky... but a money market account, in vanguard, that is easy. I can transfer my cash from my savings account in there, and pick up VUSXX easily, and then I'm making a nice return until I need that cash, whereby I can easily cash that out and have access to it as quickly as I need it.

I started reading the prospectus for VUSXX to understand the risks, and that was helpful, but still quite a bit of it is a bit "above my pay grade" and so I thought I'd reach out to the hive mind of the bogleheads where I respect the fine folks here and what they have to say.

Lets say the market starts getting worse, and larger sell-offs start happening and we go into a recession, do I need to be checking the 7-day rate of the fund on a daily basis to make sure I'm not suddenly going to be losing money or something?

As a side note: these dollar tracking funds, where they try to keep things pegged to the dollar, sound like 'stable coins' in the crypto world, which makes me a little scared :)
In my opinion (VUSXX) Vanguard Treasury Money Market Fund is a good choice for the situation you describe, and very safe.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
patrick
Posts: 2126
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Re: How risky are money market funds?

Post by patrick »

It has plenty of inflation risk but the other risks are negligible.
User avatar
HMSVictory
Posts: 1286
Joined: Sun Nov 01, 2020 7:02 am
Location: Lower Gun Deck

Re: How risky are money market funds?

Post by HMSVictory »

patrick wrote: Fri Sep 23, 2022 10:25 am It has plenty of inflation risk but the other risks are negligible.

So true. 90% of the time we worry about things that don't happen.

I was in a similar boat with about $1M of cash prior to buying my home and chose (2) online HYSA where I got 1.5-2% interest AND the FDIC guarantee on each account up to 500k (joint account). For me (and you) security was my number one concern NOT yield. Yield was secondary. I wouldn't fret about the safety of the fund you are in as it is invested in US gov obligations but its pretty easy to get FDIC coverage up to few million if you so choose to do so.
Stay the course!
User avatar
arcticpineapplecorp.
Posts: 11073
Joined: Tue Mar 06, 2012 9:22 pm

Re: How risky are money market funds?

Post by arcticpineapplecorp. »

HMSVictory wrote: Fri Sep 23, 2022 10:31 am So true. 90% of the time we worry about things that don't happen.
Ray Dalio once said "Those that worry, don't need to worry. But those that don't worry, should be worried."

those that worry, usually make a plan, have thought through options, pros/cons, etc. they'll likely be ok as a result.

those that don't worry, usually don't make a plan and may end up toast.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
User avatar
Orangutan
Posts: 302
Joined: Mon Feb 08, 2021 4:36 pm
Location: NYC

Re: How risky are money market funds?

Post by Orangutan »

This falls into the bucket of things not to worry about. If there were ever material risk issues with money market funds, there would be systemic economic and structural problems of even more concern.
Post Reply