If you can find free parking on the street, chances are you won't pull into a nearby spot that has a parking meter. If you can pay 20 cents...
If you can find free parking on the street, chances are you won’t pull into a nearby spot that has a parking meter. If you can pay 20 cents less per gallon for name-brand gasoline, chances are you won’t pay more at a competing station across the road.
But when it comes to parking cash, a lot of consumers seem to prefer a running meter and higher prices. They’re simply ignoring the problems inherent in money-market mutual funds currently yielding 0.75 percent or less, and thus are saddled with a Stupid Investment of the Week.
It’s the same chapter, new verse for low-yielding money-market funds, which have earned this dubious distinction before. Nowadays it simply appears as if some consumers who are parking cash are willing to settle for any carport in the current interest-rate storm.
“A lot of people who are in cash are more interested in return of principal than return on principal, so they don’t care about the yield, and that shows,” said Peter Crane of Crane Data, publisher of the Money Fund Intelligence newsletter.
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Stupid Investment of the Week highlights the conditions and characteristics that make a security a poor choice for an average consumer, and is written in the hope that showcasing danger in one situation will make it easier to spot and avoid trouble elsewhere. The column is not an automatic sell signal; even in the cases of low-yielding money funds, there are times — such as when an investor could face back-end sales charges — where making changes simply creates new problems.
For low-yielding money funds, the problems are simple. At 0.75 percent or less, an investor’s money isn’t going to double for roughly 100 years. Even if it was allowed to stick around and get that big, the yield lags inflation so bad that the money — after a century — would have significantly less purchasing power than it has today.
Money-market mutual funds are a commodity. Most of them buy the same kinds of investments and do very little in the form of aggressive management. Their goal is to capture whatever yield the Fed is giving. Take any 10 or 20 money funds, and their raw performance numbers will be roughly the same.
Your actual return is another matter. Separating the best from the bottom are expenses. Sales costs drive the worst money funds to the bottom of the charts. The laggards in the money funds database at iMoneyNet.com carry high sales charges, most often the heightened 12b-1 fees of “B” and “C” fund-share classes.
For investors moving to cash in B shares — which typically carry a back-end load that diminishes over time — the good news is that they can typically make the change without incurring the brunt of a sales commission, and can move into a stock or bond fund while keeping the load clock running.
In a true cash-parking situation, the savings on the load and the time put in toward the day when the out-the-door charges are eliminated and costs go down are probably worth the potential returns that are being missed.
In C shares — which take neither an upfront load nor a back-end charge, but instead carry higher expenses for life — the structure makes it hard to get ahead. The adviser is still being paid, getting a share of the 12b-1 fee, but the investor really isn’t.
“If I were using a money fund as a savings vehicle, I’d find every which way to get away from B and C shares,” said Connie Bugbee, managing editor at iMoneyNet.
The average prime retail money-market fund currently yields 1.9 percent; returns are lower, on average, for government money funds and tax-free money funds, according to iMoneyNet.
By comparison, the average money-market bank account — or even a savings account — is paying a dreadful 0.7 percent, but the top-yielding money-market bank accounts are in the 3.5 percent range, better than an investor can get in the top money funds and with bank insurance to boot.
The difference in top yields is simple: While money-market fund returns are based on what is available in the open market minus expenses, the top yielding bank accounts reflect what specific banks are willing to pay to attract customers.
Greg McBride, senior financial analyst for BankRate.com, said that savers using money-market bank accounts have to watch rates carefully because they change frequently.
“If you are willing to do a bit of the work and research, and transfer your money so that it’s at work under another roof, you can find something much better than the bad money funds. And the only person who gets paid for finding you that investment is you,” McBride said.
“If you’ve got a money-market fund that’s paying less than 1 percent, you really should consider if you are putting your money to work the right way,” he added. “It’s fine to be safe, but you still want to have something to show for investing your money.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.