Money market funds

NedS

Bostonerimus1 said:

Justso65 said:

My current DC pots are just short of my new £600k target.  My latest plan is to pull £16760 from that which would be tax free (so long as I have no other income) and top up from an ISA to meet my requirements for 5 years. So if I could realise around a potential 5% from a STMMF I would be more than happy with the fact that return would more than cover £16760 taken from my pot and it would still be increasing. Even if the STMMF fell to 4% I still cover my needs without eroding it.  I could live with some erosion if the STMMF rates fell further.  5 years down the line I would get a DC pension which would reduce my need to draw from my DC pots and a further 4 years later SP would kick in again reducing my need to draw from my DC pots. So by 67 I would expect to have a significant amount of my £600k, if not more, to use to top up my DC/SP as required.  

Is this a naive plan or does it sound feasible?

You are in an enviable position and seem to have income streams sufficient to meet your needs without overly stressing your DC pension pots. This is once scenario I mentioned where using a MMF for the majority of your DC money will work. However, you could also look at it from another perspective; as you don't really need the DC funds you can take a lot more risk and invest in equities. When you have a large pension pot you have the luxury of choice. Someone with fewer income sources and a lower pension pot won't be able settle for MMF returns over the long term and will need to take a bit more risk to get the growth they need to keep up with inflation.

If you've run the numbers and are happy with your plan then that is the right plan for you...just make sure you include inflation and the possibility of interest rates falling and maybe even the cost of a nursing home.

Agreed, in this position I would at least take some risk. You could put enough cash (£375k) in a STMMF to meet your short term cash needs, say at a reduced 4.5% return allowing for a further two rate drops, and invest the rest (£225) in a global equity index tracker / fund which should hopefully give you growth for the future. You could even use something like JGGI which also pays 4% of NAV as a dividend, also giving an income.

If you are not happy putting a large chunk into global equity in one shot, you could invest the excess monthly income into global equity each month and thus drip feed funds into equity markets whilst still retaining your capital in a STMMF as £600k at 5% is going to yield you £30k/year and the tax free personal allowance isn't rising any time soon.

MK62

OldScientist said:

MK62 said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

In terms of reducing 'potential volatility', there is never an occasion when the stock market is not potentially volatile. While volatility can be measured (e.g., VIX) is cannot be predicted except in very general terms (e.g., the standard deviation of the real annual historical returns of the US stock market is about 18%. Given a mean of about 8.5%, this means that there is about a 30-40% chance of there being a negative real return in the next year (and conversely, about 60-70% chance of a positive return).

....but is the question really whether the US stock market will be higher or lower in a year's time, or whether it will be lower at any time during the next year?

Samuelsjourney

@MK62 yes looks like the US market has started to correct. With the data coming out (unemployment, fed rate etc etc) then i think we will seem some drops with buying opportunities. Im looking wider at Asia using an ETF if the price continues to drop which it has and will move some MM funds hopefully to catch a bounce in 2025.

michaels

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Hoenir

MK62 said:

OldScientist said:

MK62 said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

In terms of reducing 'potential volatility', there is never an occasion when the stock market is not potentially volatile. While volatility can be measured (e.g., VIX) is cannot be predicted except in very general terms (e.g., the standard deviation of the real annual historical returns of the US stock market is about 18%. Given a mean of about 8.5%, this means that there is about a 30-40% chance of there being a negative real return in the next year (and conversely, about 60-70% chance of a positive return).

....but is the question really whether the US stock market will be higher or lower in a year's time, or whether it will be lower at any time during the next year?

During the period 1951-2023 the figures for the SP500  are

53.6% up trading days
46.4% down trading days

Hence why the odds are stacked against short term day traders. Nothing more than a coin toss. 

Bostonerimus1

MK62 said:

OldScientist said:

MK62 said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

In terms of reducing 'potential volatility', there is never an occasion when the stock market is not potentially volatile. While volatility can be measured (e.g., VIX) is cannot be predicted except in very general terms (e.g., the standard deviation of the real annual historical returns of the US stock market is about 18%. Given a mean of about 8.5%, this means that there is about a 30-40% chance of there being a negative real return in the next year (and conversely, about 60-70% chance of a positive return).

....but is the question really whether the US stock market will be higher or lower in a year's time, or whether it will be lower at any time during the next year?

...and no one knows for sure where the markets will be. We have historical data and that drives portfolio construction - along with individual circumstances.

Right now MMF and short term Gilts and Treasuries look good, but their yields won't stay around 5% and anyone considering a long term MMF approach will soon enough find their returns falling and mid term bonds once again giving higher yields. If you want to lock in today's rates and guarantee income then an annuity is the way to do it. MMF will very probably revert to type and for fixed income will become a poor second to a well constructed bond portfolio. But at 5% take the returns while you can. I have half of my cash in a MMF just because it is yielding 5.2%, but I have a mid to long term index equity strategy. 

MK62

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

True enough, but then we are talking about STMM funds today.......3 years ago, opinion would likely have been quite different....with the base rate at 0.1%, you'd likely not even have covered the fund fees......

PS.....nobody is recommending STMM funds as a long term strategy either........

MK62

Hoenir said:

MK62 said:

OldScientist said:

MK62 said:

Bostonerimus1 said:

Sunnylifeover50plan said:

I hold about 75% of my SIPP in a short term gbp mmf with Vanguard. I did it to reduce potential volatility. If I were in it due to trying to time the market I might think differently but I'm not and it suits my objectives at the moment. At some point in the future I will need to move back into a more traditional bond/ equity mix.

Sorry, but this sounds exactly like timing the market to me. I get worried when I see people with large cash and MMF balances as that is often because the markets are "too high to buy" or "too volatile". This can lead to long times out of the markets.

Staying out of a market because you think there might be a correction is a common reason people park money in cash. However, it has all the usual problems with market timing

The flip side to that though is just blindly throwing money at the stock market.....many have come to regret doing that too. If STMM funds are roughly matching (or bettering) inflation, then personally I don't see a problem, certainly in the short term, especially if capital preservation, rather than potentially maximising returns, is the main aim.

In terms of reducing 'potential volatility', there is never an occasion when the stock market is not potentially volatile. While volatility can be measured (e.g., VIX) is cannot be predicted except in very general terms (e.g., the standard deviation of the real annual historical returns of the US stock market is about 18%. Given a mean of about 8.5%, this means that there is about a 30-40% chance of there being a negative real return in the next year (and conversely, about 60-70% chance of a positive return).

....but is the question really whether the US stock market will be higher or lower in a year's time, or whether it will be lower at any time during the next year?

During the period 1951-2023 the figures for the SP500  are

53.6% up trading days
46.4% down trading days

Hence why the odds are stacked against short term day traders. Nothing more than a coin toss. 

Perhaps, but that gives you little insight into whether the US stock market will be lower than today at any time during the next year......

LHW99

I use an STMMF to accumulate dividends during the year, for an annual UFPLS. I don;t want to add to stocks with that money, as it will likely be there no more than 12 months, but on the other hand it gets a few more % than if I left the divis in cash in the platform for the year.

MK62

LHW99 said:

I use an STMMF to accumulate dividends during the year, for an annual UFPLS. I don;t want to add to stocks with that money, as it will likely be there no more than 12 months, but on the other hand it gets a few more % than if I left the divis in cash in the platform for the year.

A not unreasonable approach, but probably only viable on platforms where fund dealing is free (though I suppose it does depend on the dealing amounts and frequency too)......