Low Risk, No Gain: It's Time to Dump Your Money Market Mutual Fund


Mutual fund performanceThanks to rock-bottom interest rates, it's harder than ever for cautious savers to get the income they need from their savings. Many have fled from safe vehicles like CDs to dividend-paying stocks in an effort to squeeze a decent return from their money, even though stocks carry the very real risk of losing principal.

For those who aren't willing to bet on stocks, the other options aren't very appealing. And one popular choice that investors have used for decades now faces a huge threat from the low-interest-rate environment -- a threat that could kill the industry.

Money Market Mutual Funds: A Dying Breed?

Last week, JPMorgan Chase (JPM) and Goldman Sachs (GS) announced that they were closing the doors of some of their European money market funds to new investors. The move came in response to the European Central Bank cutting interest rates on deposits to zero.

That may sound like a drastic measure to take. But in the U.S., many funds have had to take similar action to keep their funds afloat.

Over the years, money market mutual funds have attracted huge amounts of savings. In the U.S., they hold more than $2.5 trillion in assets, with about 35% of that money held in funds aimed at ordinary retail investors. Yet over the past three years, returns on those funds have averaged less than 0.10% per year, and recently, many of the largest funds in the business have been paying just 0.01% in interest.

The cause of those low rates is the Federal Reserve's long-held policy of keeping short-term interest rates locked between 0% and 0.25%. In addition to chopping rates to virtually nothing, many funds have also had to respond by cutting fees and refusing new investors in order to prevent losses for existing fund investors.

Funds Under Siege

As if that weren't bad enough, money market mutual funds have also attracted attention from government regulators.

As The New York Times reported last month, the Securities and Exchange Commission believes that the funds are vulnerable to a potential repeat of the financial crisis four years ago.

Back in 2008, the bankruptcy of Lehman Brothers caused significant losses for many of the money market funds that held the brokerage firm's commercial paper. One fund, the Reserve Primary Fund, suffered such large losses that it "broke the buck" -- industry jargon for falling below its stable $1 per share price.

Although that's an extreme case, the SEC put forth evidence that smaller losses have occurred regularly throughout the history of money market funds. By its count, fund managers have had to bail out funds from losses more than 300 times in the four decades that the funds have been in existence. Without the bailouts, fund investors might have had to eat losses, despite the funds' reputation as safe places for savings.

The SEC has proposed several possible ways to prevent similar problems in the future. Among them are letting share values of money market funds float up and down rather than remaining fixed at $1, as well as forcing funds to put policies in place and have capital reserves ready in the case of massive withdrawals.

Opponents of such measures argue that such a move could itself cause a run on the funds, which in turn could destabilize the short-term credit markets that major companies rely on for day-to-day operational financing.

Get Smart: Get Your Money Insured

Regardless of what happens with the SEC, though, savers have a much more attractive option for their money. Several banks offer high-interest savings accounts that pay significantly higher rates than most money market funds, with the top rates near or above 1% currently.

Admittedly, 1% isn't much. But it also comes with something money market funds don't give you: the safety of FDIC insurance for up to $250,000. With the combination of greater security and more money in your pocket, high-yield savings accounts make more sense than ever right now.

As for money market funds, there may come a time when their rates become attractive again. For now, though, there's really no good reason to have your money in them.

Motley Fool contributor Dan Caplinger has gotten just about all his money out of money market funds. You can follow him on Twitter here. He doesn't own shares of the companies mentioned. The Motley Fool owns shares of JP Morgan Chase. Motley Fool newsletter services have recommended buying shares of Goldman Sachs.

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Had we paid attention to advice like THIS, many of us would have DISTINCTLY smaller nest eggs upon which to rely. There's no such thing as a free lunch. You can have risk, or you can have return. There IS no universal plan that somehow manages to combine the two. Granted, people do get lucky and make fortunes in the market. But by it's very nature, AT LEAST an equal number of others end up losing their shirts. Once you have "enough" to get you through retirement, you'd have to be a FOOL (even a Motley Fool) to put it all back at risk.

July 12 2012 at 1:52 AM Report abuse rate up rate down Reply

yup, just find some strong utility stocks with a good dividend and ride this out!

July 11 2012 at 9:25 PM Report abuse +2 rate up rate down Reply
1 reply to ccdae5's comment

Please let us know how you figure out EXACTLY when to implement this "sage advice"-- and when NOT to. Even a BROKEN clock is right twice a day...

July 12 2012 at 1:53 AM Report abuse +1 rate up rate down Reply

There must be something wrong at the location you applied for benifits.!!!!!! How many times have you applied...And,,,some cities,,,you may have to be a person of color.!!!! My grand daughter applied for a pail grant for college,,,,she was denied because she was not a a certain race......I do agree with you on the GOVERMENT.!!!! And,,the sad thing is,,,,OBAMA may go back in because of the stupid college kids,,,,And,,blacks will vote just because of color...But,,I have some black friends that said,,,,,,OBAMA fooled them once,,,,he want again,,,,,,THEY SAID NO TO OBAMA FOR A SECOND TERM.,!!!!

July 11 2012 at 6:29 PM Report abuse +1 rate up rate down Reply

I grew up DEMOCRAT.......At age about 25,,,,after coming out of the Navy,,,,,I changed to Republican...
..America did not get where we are at now over night...... It took Republicans and Democrates to get us where we are at now,!!!!! But,,,I have seen some of my friends work 2 jobs,,same as I have,,,but,,some are now rich...
WHY DISCOURAGE PEOPLE TO MAKE MONEY.????? If our goverment would speek more to people on how and what to do to find a job,,,instead of handing out all these free goverment benifits and programs for free,,,,this country would be better off,,,BUY,,,THE DEMOCRATES GET VOTES FROM WELFARE BENIFITS PEOPLE,,,,,,,,AND,,,LOW INCOME PEOPLE FOR THERE VOTES THEY GET free benifits.!!!!!!

July 11 2012 at 9:21 AM Report abuse -1 rate up rate down Reply
1 reply to pdbliz's comment

You talk free Government Benefits. Loss your job for three years and try and get benefits. It a joke you wantn't get them. I know I try You pay in all those years and don't get them when you need them. I guess that because I'am American.

July 11 2012 at 5:04 PM Report abuse rate up rate down Reply

First.......during the BUSH years......I was getting between $300 to $400 a month intrest on my Money Mark...
Now,,with MR. HOPE AND CHANGE OBAMA,,,,,,last month was $65.88 ,,,,,,,HOW SAD....!!!!!!
I am not a rich person,,,I have worked 2 jobs,,and saved over my 65 years.!!!! And,,now we have a CLOWN IN OFFICE that thinks I need to share what I have.....!!!!!!!!!!
Well,,All I have to say is,,,try to take it from me.!!!!!!!!!!!!!!!!!!! NOW,,AOL HAS NOT PRINTED ALOT OF MY COMMENTS,,,may be they may post this,!!!!!!!
Looks like AOL..MAY ALSO BE ON THE TAKE.!!!!!!!

July 11 2012 at 9:14 AM Report abuse rate up rate down Reply
Trudy Marie

What I wouldn't give for the days of my youth----not so long ago either---- of 5.25% on MY PASSBOOK SAVINGS...I would feel RICH today! Sad!

July 10 2012 at 7:37 PM Report abuse +4 rate up rate down Reply
1 reply to Trudy Marie's comment

The downside to higher interest in our saving account is higher interest for borrowing, and good old inflation.

July 10 2012 at 10:47 PM Report abuse +3 rate up rate down Reply
1 reply to bdyftns's comment

Precisely. But try telling THAT to the Obama haters. When's the last time you could get a 3% 30-year fixed mortgage? For every bit of (taxable) interest you earn, there is (un-tax-deductible) interest you pay. Only fools don't understand that it works both ways...

July 12 2012 at 1:59 AM Report abuse +1 rate up rate down

Lots of luck e-mailing your senators or representatives. Most of them, maybe all, do not accept e-mail . You have to write a letter and pay the postage, and even then, you don't get an answer. You could call and get someone in the office, if they are there, but they probably are out.

They don't want your input, just your vote.

July 10 2012 at 3:44 PM Report abuse +3 rate up rate down Reply
3 replies to bann585's comment

Another reason to let interest rates go. More evidence to show the government trying to muscle people into a corrupt stock market. As if tax laws weren't enough.
With 0% interest rates, companies don't have reserve cash to hire more workers. Insurance company reserve earnings can't help subsidize the premiums we pay. Hence, they go up. People have to liquidate savings to live. No one benefits except for the biggest debtor in the world, the USA, who borrows as much money as they can at interest rates approaching free. We have to fight for banks AND money market funds.
Now who's being selfish.

July 10 2012 at 1:52 PM Report abuse +6 rate up rate down Reply

In response to pdbliz. You are right about one thing all the politicians in Washington that have been there for more than one term need to go. Why are we surprised that politicians are clueless about about, economics, finance, tax reform, economic growth and banking. The vast majority are bungling idiots that never managed a for real profit operation, created a job, and understand or studied any of the above subjects. So,why do you think they can manage our economy? I like what I have seen the past 4 years compared to the disaster that followed G. W. out of office, leaving the stock market, housing market and wars without end in shambles. I am better off now than in 2009. No credit to Obama or any Republicans in office.

July 10 2012 at 11:48 AM Report abuse +5 rate up rate down Reply

Besides Dividend paying stocks... What else is there? many Stocks such as MO pay's a dividend of 4.9% and the stock is up 30%

July 10 2012 at 11:04 AM Report abuse rate up rate down Reply