Why do Money Market Funds Suck?

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knowmad
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Why do Money Market Funds Suck?

Post by knowmad » Sat May 23, 2009 12:10 pm

Why do FDIC insured online savings accounts offer rates several times higher than Vanguard Money Market funds? It would be nice to keep my emergency cash with Vanguard, but the interest rates are pitiful (.4% vs 2%+).

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stratton
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Re: Why do Money Market Funds Suck?

Post by stratton » Sat May 23, 2009 12:20 pm

knowmad wrote:Why do FDIC insured online savings accounts offer rates several times higher than Vanguard Money Market funds? It would be nice to keep my emergency cash with Vanguard, but the interest rates are pitiful (.4% vs 2%+).
Some banks need lots of money to keep the FDIC at bay?

Paul

Roy
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Re: Why do Money Market Funds Suck?

Post by Roy » Sat May 23, 2009 12:48 pm

knowmad wrote:Why do FDIC insured online savings accounts offer rates several times higher than Vanguard Money Market funds? It would be nice to keep my emergency cash with Vanguard, but the interest rates are pitiful (.4% vs 2%+).
In the broad picture of diversification, I've no problems with the role Vanguard MM funds play.

Awhile back, before the interest rates fell hard (maybe in 2007), the Vanguard MM had a nice high rate for some time—one of the highest around—and it actually made more sense to use it than many other "bond" funds, from a risk/return perspective. The Vanguard MM will rise again, and possibly higher than many competitors, again.


Roy

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White Coat Investor
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Post by White Coat Investor » Sat May 23, 2009 12:52 pm

MMFs take your money and buy very short term bonds and CDs with it. They pay you what they earn minus expenses/profit.

Banks take your money and loan it out at whatever rate they can get someone to pay them and pay you whatever it takes to get you to give them the money.

Over the long run, I think you do better with the market rate than taking whatever any given bank wants to pay you. But if you're willing to rate chase all over the place, then at times like this you'll stay a percent or two ahead of the MMFs.

Personally, I put my effort into extra hours at work, take my risk with equities, and accept the market return.

Amount I have in cash X 2% X 1 year=2 hours extra work.

If it is as easy as moving it between Vanguard funds, or if I already have an account with a bank with a good rate maybe I'll go to the trouble of putting in an online transfer. But I'm not going through the hassle of opening bank account after bank account to chase rates. Maybe if I had hundreds of thousands of dollars in cash it would be worth it to me.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

bmb
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Post by bmb » Sat May 23, 2009 1:03 pm

Funds, which make money on annual fees, have less interest than banks, which make money on interest on loans of cash, in having cash. Funds would much rather have you invest in other types of funds, where you are less likely to liquidate and they can usually charge higher fees, while banks want cash to make loans.
Also, funds have a captive audience so to speak - investors in their other funds park their cash and proceeds from other investments in the fund family's MM, while the bank has to be more competitive for MM funds.
The banks do all right with checking accounts, which seldom have high yields or impose high balance requirements.

Valuethinker
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Re: Why do Money Market Funds Suck?

Post by Valuethinker » Sat May 23, 2009 4:11 pm

knowmad wrote:Why do FDIC insured online savings accounts offer rates several times higher than Vanguard Money Market funds? It would be nice to keep my emergency cash with Vanguard, but the interest rates are pitiful (.4% vs 2%+).
it's a complete anomaly, arising out of the credit crisis.

Banks need to get retail depositors, who don't run at the first sign of trouble.

So they are paying over the odds to get those depositors. the FDIC guarantees those deposits, so the depositors feel safe.

MMFs invest in wholesale money markets, lending to banks and commercial companies. In those markets, the very low interest rates that the Fed has caused in the market, have fed through to borrowing rates.

This will fix itself. Bank interest and CD rates will come down as the market worries less about banks going broke.

If you can afford to lock up your money, you might want to investigate a 'ladder' of CDs from 6 months to 3 years, say. Staying with FDIC limits.

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Taylor Larimore
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Money Market Funds ?

Post by Taylor Larimore » Sat May 23, 2009 4:23 pm

Knowmad:

Why do Money Market Funds Suck?


I know many investors who wish they had been in money market funds during the past 20 months. :wink:

Yes. I know what you really mean.
"Simplicity is the master key to financial success." -- Jack Bogle

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rcshouldis
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Post by rcshouldis » Sat May 23, 2009 5:15 pm

EmergDoc wrote:MMFs take your money and buy very short term bonds and CDs with it. They pay you what they earn minus expenses/profit.

Banks take your money and loan it out at whatever rate they can get someone to pay them and pay you whatever it takes to get you to give them the money.

Over the long run, I think you do better with the market rate than taking whatever any given bank wants to pay you. But if you're willing to rate chase all over the place, then at times like this you'll stay a percent or two ahead of the MMFs.

Personally, I put my effort into extra hours at work, take my risk with equities, and accept the market return.

Amount I have in cash X 2% X 1 year=2 hours extra work.

If it is as easy as moving it between Vanguard funds, or if I already have an account with a bank with a good rate maybe I'll go to the trouble of putting in an online transfer. But I'm not going through the hassle of opening bank account after bank account to chase rates. Maybe if I had hundreds of thousands of dollars in cash it would be worth it to me.
I am not sure that you have to "chase rates" to easily beat Vanguard's money market rates. ( what is it now, about .44%?) I have been with Emigrant Direct for over 5 years and have always received great returns from their Savings and CD rates. Right now their online savings is yielding 1.55% and they are offering a short term CDs at around 2.00%.

Harold
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Post by Harold » Sat May 23, 2009 5:27 pm

rcshouldis wrote:I am not sure that you have to "chase rates" to easily beat Vanguard's money market rates. ( what is it now, about .44%?) I have been with Emigrant Direct for over 5 years and have always received great returns from their Savings and CD rates. Right now their online savings is yielding 1.55% and they are offering a short term CDs at around 2.00%.
Certainly there have been times when Emigrant dipped way below Prime MM, and stayed there for an extended time. (I had an Emigrant account during such a time.)

These are different animals. When banks need cash, they'll pay a higher rate. When they don't, they won't.

Mariah
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Post by Mariah » Sat May 23, 2009 11:11 pm

I'm always looking for good rates and just wanted to let others know that
http://www.ebsbdirect.com/
has a guaranteed MM rate of 2.81 APY through Sept 30, 2009.

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graveday
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Post by graveday » Sat May 23, 2009 11:41 pm

Countrywide used to pay some of the best rates. Makes you think.

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graveday
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Re: Money Market Funds ?

Post by graveday » Sat May 23, 2009 11:43 pm

Taylor Larimore wrote:Knowmad:

Why do Money Market Funds Suck?


I know many investors who wish they had been in money market funds during the past 20 months. :wink:
That would have required a good sense of timing, or fear.

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preserve
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Re: Why do Money Market Funds Suck?

Post by preserve » Sun May 24, 2009 11:47 am

knowmad wrote:Why do FDIC insured online savings accounts offer rates several times higher than Vanguard Money Market funds? It would be nice to keep my emergency cash with Vanguard, but the interest rates are pitiful (.4% vs 2%+).
If an FDIC insured online savings account did not have higher yields than MM, I don't think they would have any clients.

In my experience, online bank accounts aren't worth it. Too much hassle keeping track of it. Almost every single online bank I've put money into has either gone out of business or been bought out.

As for emergency money, I like i-bonds. Take them to any bank, and they give you cash on the spot. Can't beat that.

bluesun
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Post by bluesun » Sun May 24, 2009 1:03 pm

Also the money market has an expense ratio of .2 (or so), which reduces it again to the online savings.

I've stuck with ING direct for a few years, and to my knowledge they've almost always been ahead of prime money market. I'd like to see a chart that compared the two, however.

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Karl
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Re: Money Market Funds ?

Post by Karl » Mon May 25, 2009 3:20 am

Taylor Larimore wrote:I know many investors who wish they had been in money market funds during the past 20 months. :wink:
You could have sat in a MM for the last decade and beaten most stock funds.

Ulan
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Re: Why do Money Market Funds Suck?

Post by Ulan » Mon May 25, 2009 11:31 am

preserve wrote:In my experience, online bank accounts aren't worth it. Too much hassle keeping track of it. Almost every single online bank I've put money into has either gone out of business or been bought out.
Try some of the better run credit unions. They are non-profit, and you will get their loan profits minus expenses as monthly dividend. I'm at 2.5% APY with my savings account at the moment.

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preserve
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Re: Why do Money Market Funds Suck?

Post by preserve » Mon May 25, 2009 2:08 pm

Ulan wrote:
preserve wrote:In my experience, online bank accounts aren't worth it. Too much hassle keeping track of it. Almost every single online bank I've put money into has either gone out of business or been bought out.
Try some of the better run credit unions. They are non-profit, and you will get their loan profits minus expenses as monthly dividend. I'm at 2.5% APY with my savings account at the moment.
Yes, I've tried credit unions also. Their $10 hour teller has way too much access.

They know what you drive, what you look like, where you live, who your paid by, etc. Super sketchy.

Ulan
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Re: Why do Money Market Funds Suck?

Post by Ulan » Mon May 25, 2009 3:51 pm

preserve wrote:
Ulan wrote:
preserve wrote:In my experience, online bank accounts aren't worth it. Too much hassle keeping track of it. Almost every single online bank I've put money into has either gone out of business or been bought out.
Try some of the better run credit unions. They are non-profit, and you will get their loan profits minus expenses as monthly dividend. I'm at 2.5% APY with my savings account at the moment.
Yes, I've tried credit unions also. Their $10 hour teller has way too much access.

They know what you drive, what you look like, where you live, who your paid by, etc. Super sketchy.
Heh, my CU is in Chicago, IL, and I live in the Phoenix, AZ, area. I guess they don't know much more about me than what they see from my credit files.

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preserve
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Re: Why do Money Market Funds Suck?

Post by preserve » Tue May 26, 2009 6:04 pm

Ulan wrote:
preserve wrote:
Ulan wrote:
preserve wrote:In my experience, online bank accounts aren't worth it. Too much hassle keeping track of it. Almost every single online bank I've put money into has either gone out of business or been bought out.
Try some of the better run credit unions. They are non-profit, and you will get their loan profits minus expenses as monthly dividend. I'm at 2.5% APY with my savings account at the moment.
Yes, I've tried credit unions also. Their $10 hour teller has way too much access.

They know what you drive, what you look like, where you live, who your paid by, etc. Super sketchy.
Heh, my CU is in Chicago, IL, and I live in the Phoenix, AZ, area. I guess they don't know much more about me than what they see from my credit files.
nice.

Specialized
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Post by Specialized » Tue May 26, 2009 6:42 pm

Mariah wrote:I'm always looking for good rates and just wanted to let others know that
http://www.ebsbdirect.com/
has a guaranteed MM rate of 2.81 APY through Sept 30, 2009.
Thanks for the tip. It has a four-star rating from Bauer Financial, so it's probably not about to be seized by the FDIC.

bmb
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Post by bmb » Tue May 26, 2009 6:58 pm

Hey, it's down to 2.62% already!

Mariah
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Post by Mariah » Tue May 26, 2009 8:56 pm

That is so funny. Here is the cache of the page when it was 2.81% . Of course, I don't know how long that cache will stay there but it is interesting to see how within a week they lowered the APY.


http://74.125.93.132/search?sourceid=na ... ect.com%2F



bmb wrote:Hey, it's down to 2.62% already!

Eureka
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Re: Money Market Funds ?

Post by Eureka » Sat May 30, 2009 1:48 am

Karl wrote:
Taylor Larimore wrote:I know many investors who wish they had been in money market funds during the past 20 months. :wink:
You could have sat in a MM for the last decade and beaten most stock funds.
Thanks for that reality check, guys. It's amazing how one can hold two contrary views in one's mind at the same time. I am well aware that the Vanguard Prime Money Market Fund has outperformed the S&P 500 and Total Stock Market Index funds over the past decade (I have been graphing them repeatedly the past year). I also lament the paltry return I'm getting in Prime now.

Before I read this thread, it never occurred to me to reconcile these two facts in my mind. Another reminder that emotions are not an investor's friend.

Valuethinker
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Re: Money Market Funds ?

Post by Valuethinker » Sat May 30, 2009 2:27 am

Eureka wrote:
Karl wrote:
Taylor Larimore wrote:I know many investors who wish they had been in money market funds during the past 20 months. :wink:
You could have sat in a MM for the last decade and beaten most stock funds.
Thanks for that reality check, guys. It's amazing how one can hold two contrary views in one's mind at the same time. I am well aware that the Vanguard Prime Money Market Fund has outperformed the S&P 500 and Total Stock Market Index funds over the past decade (I have been graphing them repeatedly the past year). I also lament the paltry return I'm getting in Prime now.

Before I read this thread, it never occurred to me to reconcile these two facts in my mind. Another reminder that emotions are not an investor's friend.
What is most important to me is that you understand why short term fixed income is paying such a low return.

That is because central bank monetary policy is to try to stimulate the economy with very low interest rates.

Helpfully, inflation is also low. Your real return is essentially zero, but it is not negative. In the end, you should only care about your real return (except to discharge nominal liabilities like mortgages).

the reason bank CDs pay more is related to the credit crunch: banks need more retail deposits, and can attract them, because the FDIC gives them cover.

If there were no FDIC then only a handful of banks would be able to keep their depositors.

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