Avoiding Money Market Mutual Funds

In the late 1990s, while stationed on Guam, a friend suggested a way for me to organize my money.  He recommended that I open a money market mutual fund account with Waterhouse Securities (later TD Waterhouse and now TD Bank?) and  move my IRA (then with Invesco) under Waterhouse Securities.  He suggested I regularly fund the money market mutual fund.  Through this fund I could purchase stocks, bonds or mutual funds.

I followed my friend’s recommendations.  Over time I opened a money market mutual fund with Vanguard.  And it was well-funded (especially after I paid off my car).  Well-funded until I purchased my house in early 2005.  I eventually closed the Vanguard money market mutual fund later in 2005.

In 2007 I opened up a money market mutual fund with T. Rowe Price.  I really wanted to open a new account with Vanguard; however, Vanguard requires a minimum deposit of $3,000.  T. Rowe Price requires a minimum of $2,500 but allows you to open up an account if you deposit at least $50 or $100/month by automatic withdrawal.

In mid September 2008 the financial world was turned upside when  Lehman Brothers went belly up.  But I noticed there was some other undercurrent of anxiety.  I checked cnn.com and npr.com but saw no news stories explaining this additional anxiety. Then I visited cnbc.com.   The website reported that a money market mutual fund, the Reserve Prime Fund, held something like $685 million in Lehman corporate bonds.  When Lehman collapsed, the value of those corporate bonds dropped to zero.  As a result, the Reserve Prime Fund could not maintain the $1 net asset value (nav).  In fact, the NAV fell below $1.  The Reserve Prime Fund “broke the buck.”

When I learned what had happened, I panicked.  I remember that evening sitting on the phone for an extended period of time waiting to speak with a T. Rowe Price representative.  I was not the only one.  Eventually, after an extended wait, I spoke with a T. Rowe Price rep and requested my money be transferred from the Prime Money Market Mutual Fund (composed of highly rated corporate bonds) to the Treasury Money Market Mutual Fund.   I felt better once the money was moved.  Later that evening I explained to my sister what happened and advised her to move her money.

A few days later, with the financial & economic news still rather gloomy, I decided to pull all my money from T. Rowe Price.  I had the money (nowhere close to $100,000) transferred to my credit union where it would be federally insured.

It’s been a year and half since the anxiety- laden days of September 2008.  Yet I have no desire to open another money market mutual fund account.  Pre-September 2008 I believed that money market mutual funds were virtually, if not in fact, as a safe as a bank.  Well, September 2008 completely changed my outlook.

Surprised to discover one of the personal finance gurus shares this opinion.

Money market funds are no longer a safe enough parking place for cash.  The industry doesn’t want to acknowledge it.  Regulators are trying to avoid the issue. Yet for many conservative savers it’s simply too risky a product.

*                                                 *                                                    *

Money funds gradually evolved into a staid investment haven for cash.  The business manages more than $1 trillion for individual savers.  You always earn a market rate of interest and you can write checks off your account.  The industry pledged that a dollar invested in a money fund would be worth a dollar no matter what.  It worked for a long time.

That is, until the fall of 2008.  The industry broke its word during the darkest days of the credit crunch.  When money market fund values started falling below a buck, taxpayers had to rescue the industry.  You can’t trust the money fund “We won’t break a buck” pledge anymore.  How do we know our savings won’t vaporize during the next financial crisis?  We don’t.  The money in a fund is at risk.

From page 143, 144 of The New Frugality: How to Consume Less, Save More, and Live Better by Chris Farrell.

Thus, I avoid money market mutual funds.  My money (the little I have) is divided between a federally insured credit union and a federally insured bank.

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