Money market funds

Altior

Timing the market seems very sensible if it's a question of the virtual risk free rate easily beating official inflation.

We've just had an era of many years where inflation was above the 'risk free' rate, the calculations have now swung the other way. It could be several years before the base rate is below inflation again. That at least in part has been a strong factor in the incredibly strong bull market over recent history (expensive to hold cash/cash equivalents). At some point, there will be a run for the hills and a flight to safety, and capital security will look very attractive. 

Of course, nobody knows if or when central bank rates will be real terms negative again. Therefore, equally nobody knows what the price of equities will be at that point. 

(yes I know MM are not technically risk free). 

For me, the equation of real term gains and effective capital security vs capital risk in heavily inflated equities is a pretty persuasive one, and I am taking advantage while those conditions are in place (though nowhere near the the entire portfolio, yet).

Bostonerimus1

Altior said:

Timing the market seems very sensible if it's a question of the virtual risk free rate easily beating official inflation.

We've just had an era of many years where inflation was above the 'risk free' rate, the calculations have now swung the other way. It could be several years before the base rate is below inflation again. That at least in part has been a strong factor in the incredibly strong bull market over recent history (expensive to hold cash/cash equivalents). At some point, there will be a run for the hills and a flight to safety, and capital security will look very attractive. 

Of course, nobody knows if or when central bank rates will be real terms negative again. Therefore, equally nobody knows what the price of equities will be at that point. 

(yes I know MM are not technically risk free). 

For me, the equation of real term gains and effective capital security vs capital risk in heavily inflated equities is a pretty persuasive one, and I am taking advantage while those conditions are in place (though nowhere near the the entire portfolio, yet).

In the short term MMF rates at 5% are nice, but that should not change your long term strategy. It's fine to use a MMF for short term cash and tempting as an alternative to mid-term bonds when the yield curve is flipped, however no one is telling me when they will get back into the markets. How far do "inflated equities" have to fall? I would love to know if its a 5%, 10% or 20% correction and how long people will wait for that? Now if you are just going to use MMF for your fixed income allocation you might just wait for the interest rate to fall below that of longer term bonds and used the MMF money to buy into a mid-term bond fund...but the price will have gone up as rates fall. 

Market timing is best left to the professionals who can charge people fees for it and make money even when it fails to net them a profit. 

Steve_666_

LHW99 said:

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.

And with II you get to trade/buy for free once per month using the regular investment tool. I too intend to save up a years dividends/interest into a STMMF (likely RL) and use UFPLS every March, topping that up from investments where neccessary.

Altior

Bostonerimus1 said:

Altior said:

Timing the market seems very sensible if it's a question of the virtual risk free rate easily beating official inflation.

We've just had an era of many years where inflation was above the 'risk free' rate, the calculations have now swung the other way. It could be several years before the base rate is below inflation again. That at least in part has been a strong factor in the incredibly strong bull market over recent history (expensive to hold cash/cash equivalents). At some point, there will be a run for the hills and a flight to safety, and capital security will look very attractive. 

Of course, nobody knows if or when central bank rates will be real terms negative again. Therefore, equally nobody knows what the price of equities will be at that point. 

(yes I know MM are not technically risk free). 

For me, the equation of real term gains and effective capital security vs capital risk in heavily inflated equities is a pretty persuasive one, and I am taking advantage while those conditions are in place (though nowhere near the the entire portfolio, yet).

In the short term MMF rates at 5% are nice, but that should not change your long term strategy. It's fine to use a MMF for short term cash and tempting as an alternative to mid-term bonds when the yield curve is flipped, however no one is telling me when they will get back into the markets. How far do "inflated equities" have to fall? I would love to know if its a 5%, 10% or 20% correction and how long people will wait for that? Now if you are just going to use MMF for your fixed income allocation you might just wait for the interest rate to fall below that of longer term bonds and used the MMF money to buy into a mid-term bond fund...but the price will have gone up as rates fall. 

Market timing is best left to the professionals who can charge people fees for it and make money even when it fails to net them a profit. 

Just from my own perspective again, if money market gave me 2-3% above inflation returns I would keep a big chunk in money markets for however long that lasted. I don't consider that timing the market, it's a logical position.

Judging equities (esp US) as heavily inflated is a judgement, however that's not dictating my money market position, the decent real returns are.

I've been reducing my exposure to the US for a good while, and that is judgement again. I have been keen on gvnt bonds, corp bonds and ITs that are correlated to central bank rates after the drawdown. Discipline is almost everything in investing, some of those moves have not paid off quite as expediently as one might have liked. However I am confident they will do. Even then, I looked at my gilt fund positions this week and they are ticking along quite nicely.

My key observation however is that utilising money markets when there is a real rate of return, and headroom is not timing the market in my opinion. It's taking advantage of an opportunity that has not been available for a very long time. Plus, having funds on the sidelines is not disadvantageous should there be a covid style drawdown in US equities (and yes, accessing those funds in an economic crisis could be problematic).

Bostonerimus1

Altior said:

Bostonerimus1 said:

Altior said:

Timing the market seems very sensible if it's a question of the virtual risk free rate easily beating official inflation.

We've just had an era of many years where inflation was above the 'risk free' rate, the calculations have now swung the other way. It could be several years before the base rate is below inflation again. That at least in part has been a strong factor in the incredibly strong bull market over recent history (expensive to hold cash/cash equivalents). At some point, there will be a run for the hills and a flight to safety, and capital security will look very attractive. 

Of course, nobody knows if or when central bank rates will be real terms negative again. Therefore, equally nobody knows what the price of equities will be at that point. 

(yes I know MM are not technically risk free). 

For me, the equation of real term gains and effective capital security vs capital risk in heavily inflated equities is a pretty persuasive one, and I am taking advantage while those conditions are in place (though nowhere near the the entire portfolio, yet).

In the short term MMF rates at 5% are nice, but that should not change your long term strategy. It's fine to use a MMF for short term cash and tempting as an alternative to mid-term bonds when the yield curve is flipped, however no one is telling me when they will get back into the markets. How far do "inflated equities" have to fall? I would love to know if its a 5%, 10% or 20% correction and how long people will wait for that? Now if you are just going to use MMF for your fixed income allocation you might just wait for the interest rate to fall below that of longer term bonds and used the MMF money to buy into a mid-term bond fund...but the price will have gone up as rates fall. 

Market timing is best left to the professionals who can charge people fees for it and make money even when it fails to net them a profit. 

Just from my own perspective again, if money market gave me 2-3% above inflation returns I would keep a big chunk in money markets for however long that lasted. I don't consider that timing the market, it's a logical position.

Judging equities (esp US) as heavily inflated is a judgement, however that's not dictating my money market position, the decent real returns are.

I've been reducing my exposure to the US for a good while, and that is judgment again. I have been keen on gvnt bonds, corp bonds and ITs that are correlated to central bank rates after the drawdown. Discipline is almost everything in investing, some of those moves have not paid off quite as expediently as one might have liked. However I am confident they will do. Even then, I looked at my gilt fund positions this week and they are ticking along quite nicely.

My key observation however is that utilising money markets when there is a real rate of return, and headroom is not timing the market in my opinion. It's taking advantage of an opportunity that has not been available for a very long time. Plus, having funds on the sidelines is not disadvantageous should there be a covid style drawdown in US equities (and yes, accessing those funds in an economic crisis could be problematic).

Of course, if you have money on the sidelines waiting for a Covid like event and one doesn't happen you've just lost a lot of time in the markets. It's tempting to align our choices with what we think will happen, it's more difficult to also think about what we think won't happen and be prepared for that....if that doesn't sound too strange. Your approach is not one I take as I've largely stopped thinking and just buy cap weighted global equities after securing my retirement income sources. If I was doing it your way I would have some thresholds and numbers to drive my decisions as it's easy to think yourself into paralysis when things start changing. 

Altior

It's all tied in though isn't it, as for many years, especially recently, keeping funds on the sidelines was quite expensive and risky due to inflation. However it's a coincidental benefit of money markets providing real returns, and negligible real risk.

Nobody actually knows when a serious drawdown will come, however we do know that one will. The level of dependence that the world has on a handful of US based businesses (global operators) is quite dangerous (imv). When the music stops, I still want to ensure I have a seat.

Samuelsjourney

Altior said:

Timing the market seems very sensible if it's a question of the virtual risk free rate easily beating official inflation.

We've just had an era of many years where inflation was above the 'risk free' rate, the calculations have now swung the other way. It could be several years before the base rate is below inflation again. That at least in part has been a strong factor in the incredibly strong bull market over recent history (expensive to hold cash/cash equivalents). At some point, there will be a run for the hills and a flight to safety, and capital security will look very attractive. 

Of course, nobody knows if or when central bank rates will be real terms negative again. Therefore, equally nobody knows what the price of equities will be at that point. 

(yes I know MM are not technically risk free). 

For me, the equation of real term gains and effective capital security vs capital risk in heavily inflated equities is a pretty persuasive one, and I am taking advantage while those conditions are in place (though nowhere near the the entire portfolio, yet).

My thoughts too!

Bostonerimus1

The current inversion of the yield curve might be a reason to go from mid term bonds to MMF, but 2% over inflation in a MMF is no reason to change a long term strategy. If you are 85 then MMF might be useful to protect a legacy, but parking cash that could be invested for the long term has historically been a very bad move. If it is done then there should be firm thresholds for re-entry and nowhere am I seeing people giving numbers that describe when they will move away from the MMF. Such thinking compounded over many years is the reason why so many pension pots are quite small.

BoxerfanUK

Bostonerimus1 said:

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.

Ok in the strict sense of your words we are 'timing the market'.  However, we are not sitting here watching the market every day waiting for a crash with our finger on the trigger trying to time when to buy into equities!  As said, we are quite happy with the return we are getting on a MMF atm, and with little risk compared to equities considering the current climate in the world both economically and politically.

Ultimately we will re-evaluate if the return on MMF's begins to fall to the point when OH's pot starts to erode due to inflation and or drawdown amount, OR, we may re-evalute sooner, I really don't know, suffice to say we are happy with things as they are currently.  That may change tomorrow, next month, or next year, who knows, but we are not chasing the very highest returns come what may!

Bostonerimus1

BoxerfanUK said:

Bostonerimus1 said:

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.

Ok in the strict sense of your words we are 'timing the market'.  However, we are not sitting here watching the market every day waiting for a crash with our finger on the trigger trying to time when to buy into equities!  As said, we are quite happy with the return we are getting on a MMF atm, and with little risk compared to equities considering the current climate in the world both economically and politically.

Ultimately we will re-evaluate if the return on MMF's begins to fall to the point when OH's pot starts to erode due to inflation and or drawdown amount, OR, we may re-evalute sooner, I really don't know, suffice to say we are happy with things as they are currently.  That may change tomorrow, next month, or next year, who knows, but we are not chasing the very highest returns come what may!

I can sympathize with your approach, I'm just concerned that in the short term it's fine, but that you are making things more difficult for yourself in the long term. The fear of risk is a perennial problem for many investors and it becomes particularly acute as they approach retirement and they focus on capital preservation in the short term rather than the need to grow their pot to sustain a 30 year index linked income. I'm not saying that your approach is necessarily wrong - it's not "black and white", but any plan must be stress tested and that usually involves a spreadsheet (or online app) and a lot of pessimistic assumptions. If your plan can survive that then it is a good one. I re-emphasize the need to have objective criteria for changing your approach that are linked to your plan projections.