Can you lose money in a Money Market savings account ?

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over45
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Can you lose money in a Money Market savings account ?

Post by over45 »

Can you lose money in a Money Market savings account ?

If they are investment accounts and not deposit accounts - is the principal at risk if the investments backing the money market product decline in value? The difference in rates between a straight deposit account vs a money market account are nearly 100bps +, and that must be associated with risk.

Is it also correct that they are not insured? (more risk).
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Re: Can you lose money in a Money Market savings account ?

Post by onourway »

It is important to understand that there are two similar products with slightly different names and vastly different guarantees. A Money Market Account is treated for all intents and purposes the same as a savings account. It has the same $250k FDIC insurance, and the same 6 withdrawals per month limit as a savings account. What's different is how your bank can use the assets deposited there.

A Money Market Fund is a cash-like account that you purchase from your brokerage. These come in a variety of types, with a variety of levels of safety. I'd characterize these as from 'very safe' to 'very very safe', but understand that they are not guaranteed. On the one end you have Municipal funds that seek to shield investors from Federal and/or state tax. You then have Prime funds which will typically have the highest yield, and then at the safest end of the spectrum, you have government funds that are not tax-exempt, but invest in only government short-term debt and are the safest. These funds are not subject to the funding and liquidity gates that Prime and Municipal funds are under recent SEC rule changes. Note that at least one money market fund did falter in 2008, preventing people from withdrawing their money for a significant period of time. On the one hand this illustrates the risk. On the other hand, the fact that (AFAIK) only one fund 'broke the buck' even in 2008 is a testament to how safe these funds are.

If you are concerned about security, a bank account/money market account is your best bet. These pay as much or more than the best money market funds currently, so there is really no reason to choose a fund other than for convenience or the tax benefit.
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over45
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Re: Can you lose money in a Money Market savings account ?

Post by over45 »

From what I have gathered - the money market savings accounts are tied to the money market funds and as such can lose money. I think they are two sides to the same product, and they are not insured. If you could point me to information that says otherwise I would appreciate it.

I am not worried about losing money in them at the moment - but possibly down the road if severe market dislocations occur. There appears to be some discussion of no more govt. bailouts of banks/investment banks if the next crisis should occur, and that means shareholders and depositors would foot the bill - in excess of FDIC insurance. As MMA are not insured - that makes them open to confiscation in an extreme event.
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Re: Can you lose money in a Money Market savings account ?

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alex_686
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Re: Can you lose money in a Money Market savings account ?

Post by alex_686 »

over45 wrote: Thu Feb 22, 2018 9:19 am Can you lose money in a Money Market savings account ?

Is it also correct that they are not insured? (more risk).
A bank's money market account - while having the same name - is a totally separate thing. These are bank deposits, not a mutual fund. They are FDIC insured.

IIRC, in the past 40 years money market funds have broken the buck twice. In all cases investors were able to recover 95%+ of their funds. Not exactly fun days as it took a little while to short everything out.

During the 2008 crisis Money Market funds were required to sign up for a FDIC type of insurance. I believe this program has ended.

Since then there have been a host of reforms to make money market funds even more conservative, for example forcing them to hold a higher percentage liquid treasuries.

So low, low risk.
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Re: Can you lose money in a Money Market savings account ?

Post by wolf359 »

Money market accounts at an FDIC-insured bank are FDIC insured. Source: https://www.fdic.gov/consumers/consumer ... ciorn.html

However, while the principal is insured, the value is not. If you hold the money in a savings account over long periods of time, you will lose to inflation. Hold $100,000 in a savings account for 10 years, and its real value will drop, even if its nominal value doesn't. I'd argue that that is losing money.

To the spirit of your original question, however, your deposit will be protected up to FDIC limits.
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Re: Can you lose money in a Money Market savings account ?

Post by nisiprius »

No, over45. You misunderstand. It's the fault of the banks and Congress for allowing banks to use a very confusing and deceptive name. You are right to have paid attention to the name, and to wonder what it actually means.

I'm going to assume the bank is a member of the FDIC.

"Money market deposit account" (MMDA) is the official name of a form of bank savings account.

MMDAs are exactly as safe as any other kind of (FDIC-member) bank savings account. Don't worry about them. They usually have minor restrictions on them, like limiting the number of withdrawals per month. If you like the tradeoff--can live with the restrictions to get the higher rate--the decision is just as easy as it sounds.

"Money market deposit account" doesn't mean "invests in the money market." It means "has higher interest, and we want you to think of it as competive with real money market mutual funds." "Money market deposit account" is no more like "money market mutual fund" than "root beer" is like "beer." Recent legitimate concerns about "money market funds," i.e. mutual funds, do not apply to MMDAs.

They are just like any other bank savings account in terms of safety. Banks are closely regulated by bank regulators who make sure it follows rules about how much the bank must hold in reserves and what kinds of investments the bank can make, so banks rarely fail. (FDIC member banks) are insured by FDIC deposit insurance, and when they do fail--eight of them in 2017--it's hardly even an inconvenience to depositors. The rules are no different for MMDAs and other savings accounts, and the bank does not make different investments for MMDAs than it does for any other savings account.

"Money market mutual fund" is the full name of what is often called a "money market account" for short. It is a special kind of mutual fund. It does indeed look and feel much like a bank account from the point of view of the shareholder, and often provides checkbooks so that you can redeem from the fund by writing "a check." Money market mutual funds are not currently insured by the FDIC. During the time they've existed, people have always described them in waffly terms, "theoretically not as safe as a bank account, but probably very safe." The Reserve Primary Money Market Fund made headlines when it collapsed in September, 2008. It was very unpleasant for fund shareholders, who were locked out of access to their money for many months. They eventually got almost all of their money back... but in stages and chunks over a period of about two years.

The reason for the name "money market deposit accounts" is that banks were getting hammered during a time when bank interest rates were capped by Regulation Q, at about 6%, while money market funds were paying rates like 10% and 11%. I still remember the day one of my colleagues came to lunch bubbling over with excitement because he had learned that the IRS would accept money market account checks in payment of taxes, and he was going to be earning interest at that high rate for the many weeks it then took the IRS to process a check.

In order to help banks compete, while not, at that time, changing the basic regulations, Congress passed a law allowing banks to offer these so-called "money market deposit accounts." The name didn't mean they invested in the money market, it simply meant that they hoped to compete with the (real) money market mutual funds. In order to put a fig leaf over the whole thing, they said that banks would be allowed to pay higher rates, but only on these accounts, and would be required to place extra restrictions on them so that everybody wouldn't just replace all of their bank accounts with MMDAs.

For a very very short time, right after they were introduced, MMDA interest rates actually were much higher than those of regular savings accounts, but that didn't last long.
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Re: Can you lose money in a Money Market savings account ?

Post by nisiprius »

wolf359 wrote: Thu Feb 22, 2018 10:19 am... If you hold the money in a savings account over long periods of time, you will lose to inflation. Hold $100,000 in a savings account for 10 years, and its real value will drop, even if its nominal value doesn't. I'd argue that that is losing money...
Mr. Broken Record here. I think if you check, it's hard to find a good clear easy comparison, that decent bank accounts have, in fact, earned just about enough interest to keep up with inflation and then some. Maybe not after taxes. I would also argue that the only time people characterize "loss of real value" as "losing money" is when they are attacking bank accounts and TIPS. With every other investment, they call it "loss of real value."
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over45
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Re: Can you lose money in a Money Market savings account ?

Post by over45 »

thank you for the clarification. it is also my understanding that the FDIC insurance coverage limit applies to the total funds held in all FDIC insured institutions in aggregate. So if you were well off and had 250k in one bank and 250k in another - your total insurance coverage is limited to 250k and you could lose 250k in an extreme event. is that correct?
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Re: Can you lose money in a Money Market savings account ?

Post by livesoft »

Technically the answer is Yes, but let me explain.

First, we typically think a MM account is FDIC-insured, but a MM fund is not. But places are fast and loose with terms.

My spouse's previous 401(k) had a MM in it. The 401(k) charged an extra fee of 1.5% on all investments in the 401(k), so when the MM was paying 0.1% a few years ago, one was guaranteed to lose 1.4% each year.
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Re: Can you lose money in a Money Market savings account ?

Post by Ged »

over45 wrote: Thu Feb 22, 2018 11:14 am is that correct?
No. You are covered for $250K per bank, per depositor, per account type.

This is a good explanation of the rules:

https://www.nolo.com/legal-encyclopedia ... 803-2.html
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Re: Can you lose money in a Money Market savings account ?

Post by DrGoogle2017 »

Yes, in 2008, there was a MMF that broke a buck.
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Re: Can you lose money in a Money Market savings account ?

Post by sport »

There is one other difference between MM funds and MM accounts. The yield of MM funds is the actual rate of the current short term "money market" minus the fund's expenses. The yield of a MM account is set by the bank to meet the needs of the bank.
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Re: Can you lose money in a Money Market savings account ?

Post by sport »

over45 wrote: Thu Feb 22, 2018 11:14 am thank you for the clarification. it is also my understanding that the FDIC insurance coverage limit applies to the total funds held in all FDIC insured institutions in aggregate. So if you were well off and had 250k in one bank and 250k in another - your total insurance coverage is limited to 250k and you could lose 250k in an extreme event. is that correct?
No, this is wrong. The insurance is per investor per bank. In fact, if your bank account has two beneficiaries listed and is POD (payable on death), the FDIC insurance is $500,000. For three beneficiaries, $750,000, etc.
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Re: Can you lose money in a Money Market savings account ?

Post by Tanelorn »

DrGoogle2017 wrote: Thu Feb 22, 2018 11:28 am Yes, in 2008, there was a MMF that broke a buck.
This one:

https://www.thebalance.com/reserve-primary-fund-3305671
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Re: Can you lose money in a Money Market savings account ?

Post by anoop »

alex_686 wrote: Thu Feb 22, 2018 10:15 am
IIRC, in the past 40 years money market funds have broken the buck twice. In all cases investors were able to recover 95%+ of their funds. Not exactly fun days as it took a little while to short everything out.
ha ha
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Re: Can you lose money in a Money Market savings account ?

Post by dm200 »

Generally speaking a "Money Market savings account" means an account at a Bank or Credit Union. For this type of account, it is almost always federally insured by FDIC (bank) or NCUA (credit union) but not always. If federal insurance is important to you, verify it yourself.

For such accounts at banks or credit union, unless the account agreement says otherwise, the rate you receive is completely up to the bank or credit union. Usually, they pay higher rates -- BUT do not have to. They also usually have some restrictions of the number and type of withdrawals allowed per month.

If such an account is at a federally insured bank or credit union and you are under the limit, then you cannot lost money.
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Re: Can you lose money in a Money Market savings account ?

Post by dm200 »

sport wrote: Thu Feb 22, 2018 11:34 am
over45 wrote: Thu Feb 22, 2018 11:14 am thank you for the clarification. it is also my understanding that the FDIC insurance coverage limit applies to the total funds held in all FDIC insured institutions in aggregate. So if you were well off and had 250k in one bank and 250k in another - your total insurance coverage is limited to 250k and you could lose 250k in an extreme event. is that correct?
No, this is wrong. The insurance is per investor per bank. In fact, if your bank account has two beneficiaries listed and is POD (payable on death), the FDIC insurance is $500,000. For three beneficiaries, $750,000, etc.
Yes - per bank or credit union.
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Re: Can you lose money in a Money Market savings account ?

Post by itstoomuch »

Once upon a time, yes, you could lose $$ in a MMkt.
circa 2003, our 529 had a MMkt that broke $1 on the negative side. I bought up to our limit in 529 contributions for the state's tax benefit.
Shortly there after, the FedResv stepped in to stabilize the banking system, the 529's MMkt exceeded $1 where upon I sold for tuition payments.
IIRC, I made 10% (annualized) in a few weeks :greedy .

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Re: Can you lose money in a Money Market savings account ?

Post by alex_686 »

dm200 wrote: Thu Feb 22, 2018 11:52 am Yes - per bank or credit union.
Credit unions are covered by NUCA, not FDIC. Basically the same thing but different organizations.
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Re: Can you lose money in a Money Market savings account ?

Post by dm200 »

What's different is how your bank can use the assets deposited there.
Subject to wise and prudent management (including asset liability management), I do not think there are restrictions or rules/regulations about how the bank or credit union can use such deposits. Could you elaborate?
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Re: Can you lose money in a Money Market savings account ?

Post by dm200 »

alex_686 wrote: Thu Feb 22, 2018 11:55 am
dm200 wrote: Thu Feb 22, 2018 11:52 am Yes - per bank or credit union.
Credit unions are covered by NUCA, not FDIC. Basically the same thing but different organizations.
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Re: Can you lose money in a Money Market savings account ?

Post by over45 »

I guess the FDIC is funded by banks and not the govt. So if banks go belly up like in the S&L crisis - the govt. may step in to fund the FDIC. I learned a hard lesson on the difference between the words "may" and "will" in a legal proceeding. As long as they can print $$ with reckless abandon we may become whole - but that $$ is likely to be worth less than what it replaced.

They can change the rules at anytime to fit their needs. Just look at the suspension of having to have to mark assets to market for banks. Many would be insolvent without that stroke of a pen.

I don't know if it bothers anyone else in that the money in a bank is really only digits on a computer and in an extreme event they could simply throw out the rules and say "sorry-we're going to wack everyone with a 15% haircut to save the banking system. I am sure there is some wording somewhere that says the rules are suspended in the case of a federal emergency.
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Re: Can you lose money in a Money Market savings account ?

Post by welderwannabe »

If you are really bored, you can look up the Federal Reserve Reg D. As far as the Fed is concerned, a money market account is just a savings account. They no longer make any distinction.

I find it very confusing as well, and I wish banks couldn't call them money markets. They have nothing to do with the 'money market'. They are simply savings account with limited check writing privileges. It confuses everyone.


https://www.federalreserve.gov/boarddoc ... _depos.pdf
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Re: Can you lose money in a Money Market savings account ?

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over45 wrote: Thu Feb 22, 2018 12:34 pm I don't know if it bothers anyone else in that the money in a bank is really only digits on a computer and in an extreme event they could simply throw out the rules and say "sorry-we're going to wack everyone with a 15% haircut to save the banking system.
If not digits, then what else? At its core money is debt, an obligation, a bond, a credit. A special type of debt to be sure, but still debt. Debt is a social construct and part of the social contract. The option has always existed for its repudiation.

A good read on this subject is Money: The Unauthorised Biography by Felix Martin
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Re: Can you lose money in a Money Market savings account ?

Post by over45 »

If not digits, then what else? At its core money is debt, an obligation, a bond, a credit.

and that gets to the whole discussion of what money is. money vs. currency. what's in the bank - money or currency? and who's money is it? once you hand it over to the bank it becomes theirs and you get the right to demand it back as long as they have it or can pay it back. and if they pay you back with those "federal reserve notes", which are debt, will those be worth anything more than the paper they are printed on (or the electrons used to create it in digital form).
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Re: Can you lose money in a Money Market savings account ?

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over45 wrote: Thu Feb 22, 2018 12:34 pm I guess the FDIC is funded by banks and not the govt. So if banks go belly up like in the S&L crisis - the govt. may step in to fund the FDIC. I learned a hard lesson on the difference between the words "may" and "will" in a legal proceeding. As long as they can print $$ with reckless abandon we may become whole - but that $$ is likely to be worth less than what it replaced.
They can change the rules at anytime to fit their needs. Just look at the suspension of having to have to mark assets to market for banks. Many would be insolvent without that stroke of a pen.
I don't know if it bothers anyone else in that the money in a bank is really only digits on a computer and in an extreme event they could simply throw out the rules and say "sorry-we're going to wack everyone with a 15% haircut to save the banking system. I am sure there is some wording somewhere that says the rules are suspended in the case of a federal emergency.
While run by different federal government agencies and having a different funding methodology (NCUA for federally insured credit unions and FDIC for federally insured banks), BOTH the FDIC and NCUA federal insurance is backed by an "agency of the Federal Government".

If you can find this alleged wording - let us know. It may be there, but I am not aware of it.

Could you elaborate on "mark assets to market for banks". That sounds lime an accounting rule.
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Re: Can you lose money in a Money Market savings account ?

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over45 wrote: Thu Feb 22, 2018 12:49 pm If not digits, then what else? At its core money is debt, an obligation, a bond, a credit.

and that gets to the whole discussion of what money is. money vs. currency. what's in the bank - money or currency? and who's money is it? once you hand it over to the bank it becomes theirs and you get the right to demand it back as long as they have it or can pay it back. and if they pay you back with those "federal reserve notes", which are debt, will those be worth anything more than the paper they are printed on (or the electrons used to create it in digital form).
If you have a suggestion of a store of wealth that can actually be spent and yet is more secure than US currency, we are all ears. Short of that, I'm not exactly sure what your point is.
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Re: Can you lose money in a Money Market savings account ?

Post by 3funder »

onourway wrote: Thu Feb 22, 2018 9:50 am It is important to understand that there are two similar products with slightly different names and vastly different guarantees. A Money Market Account is treated for all intents and purposes the same as a savings account. It has the same $250k FDIC insurance, and the same 6 withdrawals per month limit as a savings account. What's different is how your bank can use the assets deposited there.

A Money Market Fund is a cash-like account that you purchase from your brokerage. These come in a variety of types, with a variety of levels of safety. I'd characterize these as from 'very safe' to 'very very safe', but understand that they are not guaranteed. On the one end you have Municipal funds that seek to shield investors from Federal and/or state tax. You then have Prime funds which will typically have the highest yield, and then at the safest end of the spectrum, you have government funds that are not tax-exempt, but invest in only government short-term debt and are the safest. These funds are not subject to the funding and liquidity gates that Prime and Municipal funds are under recent SEC rule changes. Note that at least one money market fund did falter in 2008, preventing people from withdrawing their money for a significant period of time. On the one hand this illustrates the risk. On the other hand, the fact that (AFAIK) only one fund 'broke the buck' even in 2008 is a testament to how safe these funds are.

If you are concerned about security, a bank account/money market account is your best bet. These pay as much or more than the best money market funds currently, so there is really no reason to choose a fund other than for convenience or the tax benefit.
+1. It was a really big deal when that one fund broke the buck, so yes, you could lose money in a money market FUND, but I still wouldn't bet on it happening.
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Re: Can you lose money in a Money Market savings account ?

Post by dm200 »

One (big in my opinion) difference between a MM FUND and MM account (in a bank or credit union) is that banks and credit unions almost always have "reserves" or capital ratios in the 6 -15% range and are normally required to have such capital reserves. MM FUNDS do not have such requirements.
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Re: Can you lose money in a Money Market savings account ?

Post by over45 »

If you have a suggestion of a store of wealth that can actually be spent and yet is more secure than US currency, we are all ears.
that's the 1.5 quadrillion dollar question. wish I knew. history suggests we will learn the answer at some point.

"mark assets to market" is an accounting rule banks used to follow where they had to list the current value of assets held (i.e. real estate) vs. liabilities. if a bank gave a 200k loan on a property that subsequently dropped in value to 150k, it would negatively impact their financial statement. they suspended that rule and also explains why many banks have been sitting on empty homes without selling them because once they do they'll have to show the loss.
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Re: Can you lose money in a Money Market savings account ?

Post by onourway »

mkasrp wrote: Thu Feb 22, 2018 1:37 pm Is this discussion for VMMXX symbol (Vanguard Prime Money Market fund) ?

If Yes,
Then please explain my scenario:
I have Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) of appx. 20K that has Total gain of $3242 , I want to move it to VMMXX Vanguard Prime Money Market Fund (VMMXX). Is this considered as I sold the fund and will have tax liability on my gains of $3242 for that year ? OR it is just like exchange of the funds and no tax on Total gain ?

Best Regards
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Any exchange of funds in a taxable account is considered sale of shares and you will owe tax. Whether to a money market fund, a bond fund, or another stock fund.
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Re: Can you lose money in a Money Market savings account ?

Post by Northern Flicker »

Three types of money market accounts would be viewed as completely safe in terms of getting your full principal back:

1. Money market mutual funds that invest exclusively in instruments that are backed by the full faith and credit of the US govt.

2. NCUA-insured money market accounts located at credit unions and having balances that are not over the insured limit derived from the titling of the account.

3.. FDIC-insured money market accounts located at banks and having balances that are not over the insured limit derived from the titling of the account.

The Vanguard Federal Money Market fund is very close, but a little short of 100% govt backed. Some of the obligations are US govt agency debt without such an explicit guarantee.
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Re: Can you lose money in a Money Market savings account ?

Post by over45 »

Three types of money market accounts would be viewed as completely safe in terms of getting your full principal back:

1. Money market mutual funds that invest exclusively in instruments that are backed by the full faith and credit of the US govt.
This one does not make sense to me because it may invest in Treasuries that can go down in value as rates rise. Unless they are hedged somehow by the fund manager. Or can you elaborate... tks
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Re: Can you lose money in a Money Market savings account ?

Post by alex_686 »

over45 wrote: Thu Feb 22, 2018 2:03 pm
Three types of money market accounts would be viewed as completely safe in terms of getting your full principal back:

1. Money market mutual funds that invest exclusively in instruments that are backed by the full faith and credit of the US govt.
This one does not make sense to me because it may invest in Treasuries that can go down in value as rates rise. Unless they are hedged somehow by the fund manager. Or can you elaborate... tks
Money market funds have to hold treasuries with a maturity of less than a year. Duration is not a big deal here. Things would have to be pretty wacky for them to lose nominal value. As a example, Vanguard's Prime Money Market has a duration of .13. Now, this funds holds stuff other than Treasuries but you get the idea.
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Re: Can you lose money in a Money Market savings account ?

Post by Northern Flicker »

over45 wrote: Thu Feb 22, 2018 2:03 pm
Three types of money market accounts would be viewed as completely safe in terms of getting your full principal back:

1. Money market mutual funds that invest exclusively in instruments that are backed by the full faith and credit of the US govt.
This one does not make sense to me because it may invest in Treasuries that can go down in value as rates rise. Unless they are hedged somehow by the fund manager. Or can you elaborate... tks
VUSXX, the Vanguard Treasury money market fund, invests exclusively in t-bills with a 53-day average maturity. This leads to a sufficiently short duration that interest rate fluctuations do not affect NAV.
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Re: Can you lose money in a Money Market savings account ?

Post by LadyGeek »

This thread has run its course and is locked (topic exhausted, no added value to continue, getting contentious). See: Locked Topics
Moderators or site admins may lock a topic (set it so no more replies may be added) when a violation of posting policy has occurred. Occasionally, even if there are no overt violations of posting policy, a topic (or thread) will reach a point where the information content of the discussion has been essentially exhausted and further replies are much more likely to cause distress to the community than add anything of value.
New member mkasrp has a question which I've moved into a stand-alone thread. See: [Is this fund transaction taxable?]
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