Money market funds

Linton

Short Term Money Market funds  (the Short Term is key) in my view  are a valid alternative to cash to cover 1-5 year duration liabilities.  The fact that you can use them inappropriately for market timing, applies equally well  to cash, if not more so.

But that is a comment about a strategy of market timing, not the investments that you may happen to use. Advocating investing in anything must be subject to its appropriateness for the purpose.

STMMs have the advantage that they are readily accessible from an investment account when high interest cash may not be.   

Pat38493

I tend to use the Royal London Short Term money market accumulation fund for any significant amounts of "cash" that I want to keep in pensions or other investment accounts.

saucer

I’ll bet some people wish today that more of their portfolio was in STMMFs

SouthCoastBoy

saucer said:

I’ll bet some people wish today that more of their portfolio was in STMMFs

however if they have been in equities for the last 18 mths, instead of a STMMF they should still be ahead. 

LHW99

MK62 said:

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)......

True. I am with II, so get one free trade permonth. I don't always use that, as I tend to buy and hold, and on the whole (apart from £2880 ish pa in 2 or 3 lumps) not trading regularly.

Bostonerimus1

Short term money market funds are good tools to have in your investing and retirement income tool box. But this thread has uncovered some dangers in their use IMO.

1) Are they a good place to hold retirement assets just before you retire. Well yes and no - it depends on how much. They are a good place to hold a couple of years of living expenses so you can draw on those when the markets fall rather than selling at a loss. I would not use them as a "safe" alternative to equities and bonds.
2) If you do use a MMF as a place to avoid volatility of the markets for a large part of your pension/investment pot then you run into all the issues with market timing and when to "get back in" so I would not do that myself.
3) Is a MMF a viable way to invest large portions of your money over the long term?. Probably not. The current high rates will fall and longer term bonds will give better yields.

So MMF are good ways to manage short term cash (ie. less than say 3 years). You get a bit of yield and easy access if times are tough. They are more about cash management than investing.

Hoenir

MK62 said:

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......

There's some indicators which provide a realistic gauge of the upside. Markets ultimately reflect the performance of the real economy. Not the momentum created by the directional flow of money into any particular stock or group of listed stocks. 

OldScientist

Since this thread has transformed into a discussion about duration of fixed income I thought I'd add another comment.

For bond funds, STMMF, and savings accounts the following apply
1) In a rising yield (interest rate) environment short duration fixed income (i.e., STMFF/cash) are likely to have a better return than longer duration
2) In a falling yield environment, longer duration fixed income (i.e. long bonds) are likely to have a better return than shorter duration
3) Where yields stay the same, longer duration fixed income is likely to have a higher return.

While I indulge in a some market timing with a small fraction of my fixed income (this is a relatively safe way to deal with my urge to tinker!), in reality whether longer or shorter duration should have been chosen is only known after the event.

For a passive approach (i.e., choose a duration and stick with it), an intermediate duration bond fund will be OK since it will perform better than cash when yields are falling and better than long bonds when yields are rising. There are a small number of funds available - a few fund houses offer 0 to 5 year gilts (which is probably more short than intermediate), while ishares offer 0 to 10 year gilts (more intermediate). Of course, an intermediate duration could be obtained by holding both a longish and shortish bond/STMM funds (e.g., Vanguard global bonds and Vanguard global short bonds or a STMMF).

I also note that the difference in performance in retirement between different bond funds has generally been dwarfed by the effect of the overall asset allocation (i.e., between equities and fixed income).

BoxerfanUK

BoxerfanUK said:

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

Completely understand the comments re MMF's not being a good idea for the longer term and I agree, but for my OH, (at the moment) at current rates, having crystallised 16.5K in April (1.375K per month) via FAD this tax year, but currently her pot is growing at just over 2K per month in a MMF, so all things considered, her pot is growing faster than she is drawing on it.

As a comparison, since the weekend downturn if she had invested her pot all in HSBC Global strategy she would be 2K down on what her MMF is, appreciate that could all change and bounce back tomorrow though.

Obviously will keep a close eye on it and when the time comes that a MMF is no longer producing the required return we will look at other options.  Yes she may be missing out on higher returns with equities but if she's happy with what she's getting back then I don't see a problem unless I'm missing something!  We are not trying to 'time' the market as she is content with the current return, but if a good buying opportunity into equities arises.........

Bostonerimus1

BoxerfanUK said:

BoxerfanUK said:

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

Completely understand the comments re MMF's not being a good idea for the longer term and I agree, but for my OH, (at the moment) at current rates, having crystallised 16.5K in April (1.375K per month) via FAD this tax year, but currently her pot is growing at just over 2K per month in a MMF, so all things considered, her pot is growing faster than she is drawing on it.

As a comparison, since the weekend downturn if she had invested her pot all in HSBC Global strategy she would be 2K down on what her MMF is, appreciate that could all change and bounce back tomorrow though.

Obviously will keep a close eye on it and when the time comes that a MMF is no longer producing the required return we will look at other options.  Yes she may be missing out on higher returns with equities but if she's happy with what she's getting back then I don't see a problem unless I'm missing something!  We are not trying to 'time' the market as she is content with the current return, but if a good buying opportunity into equities arises.........

This is a classic contradiction in a single sentence. You are timing the market. What exactly is this "good buying opportunity". You are obviously doing ok in the short term and everything looks good, but the MMF rates will almost certainly fall. If your drawdown is sufficiently small then a MMF might well work for the rest of your lives, but that would not be using your money efficiently. I encourage you to go back and look at the basics of long term investing and firmly decide on your criteria for that "good buying opportunity". What scares me is that they won't be forthcoming and MMF rates will fall and the markets will have risen and you will have to buy into the market at an even higher price than today as your MMF is losing to inflation.