advertisement
Money-market mutual funds are back in style. After 1% yields put them on the investing shelf in 2004, near-5% yields have them back in the asset-allocation debate in 2006.
The current debate revolves around whether to dump bond funds for money-market funds. After all, why would investors want to own an intermediate-term bond fund that yields 5.1% (Fidelity Investment Grade Bond (FBNDX), for example) but that is vulnerable to rising interest rates, when they can own a money-market fund that yields 4.9% (Fidelity Cash Reserves (FDRXX)) and that is immune to rising rates?
The answer lies in how you define risk. Money-market investors don't risk losing money, but they do risk missing out on return elsewhere. If market interest rates move lower, money-market yields, which are simply a snapshot in time and no guarantee of what an investor might earn over the next year, will fall. Bond prices and bond-fund returns, on the other hand, would improve if rates move lower.
And although lower interest rates may seem far-fetched, given the Federal Reserve's remarkable string of interest-rate increases, mixed economic signals pushed the Fed to stand pat at its most recent meeting and have a number of high-profile bond fund managers practically bullish about the bond market's near-term prospects.
For example, PIMCO bond guru Bill Gross argues in a recent Investment Outlook that rates actually peaked in early July. Meanwhile, Dan Fuss of Loomis Sayles Bond (LSBRX) has positioned his fund for an expected cyclical peak in interest rates, while Metropolitan West's investment team has moved from a defensive interest-rate position to a more neutral one. And when three of our favorite bond-fund managers get more bullish, or at least less bearish, on the market, we think it pays to listen.
Investors might argue that they will simply shift back out of money markets if yields fall and bond prospects improve, but we think that's a tricky game to play. In the late 1990s, investors went the other direction, chasing returns by shifting out of bond funds and into stock funds, and we know how that turned out.
More from MSN Money
Better returns made easy
We think a better move is to shift out of low-yielding cash-like accounts because higher-yielding options are hiding in plain sight.Specifically, consider shifting out of low-yielding bank savings and bank money-market savings accounts and into money-market mutual funds or online savings accounts. For example, a $10,000 investment in a Chase Money Market Savings Account recently earned interest at an annualized rate of just 1.34%. A similar amount in a Bank of America Money Market Savings Account earned interest at a rate of just 1.49%. For net-savvy investors, online savings accounts offer yields in the neighborhood of 5%, while the average taxable money-market fund offers a healthy 4.7% yield, according to iMoneyNet.com.
Unlike bank savings accounts, money-market mutual funds aren't FDIC insured, but they must adhere to strict investment guidelines and carry almost no risk. One-year certificates of deposit offer similar yields but often charge penalties for early withdrawal.
So, rather than messing up an asset-allocation plan that might call for a 30% bond allocation, we think it makes more sense to take advantage of higher yields by shifting assets within a plan's cash allocation. Why be content with 1.5% now that 4.7% or even 5% is there for the taking?
By Scott Berry, CFA
Rate this Article
High
