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Are money market accounts safe?

Earlier financial crises have helped make money market funds safer this time around. But not every fund is created equal. Jonathan Scheid shares why the difference between government and prime money market funds matters.

Transcript

Tim Maurer:
Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great finance questions with straightforward answers from industry thought leaders. Today’s question will be answered by Jonathan Scheid, Buckingham’s Managing Director of Solutions. And Jonathan, I want to talk about money markets. Are money market accounts actually safe?

Jonathan Scheid:
Generally, yes. And so following the global financial credit crisis in 2008, 2009, a number of rules were passed following that because that was the most recent time that we had a money market. It was only one money market fund, actually what’s called, break the buck. And so IT didn’t post an nav of one dollar, which is the net asset value. And so people thought they were in a very conservative investment. This money fund that they had access to all the time, but they weren’t getting the dollar that they put in back. So that happened once, and so what has happened is that the rules have changed on the type of investments, the length of maturity that they’re allowed to have and the credit quality that can be used in those funds. Now, not every money market is the same.

Jonathan Scheid:
And so you actually might be seeing headlines when markets declined very quickly when they’re saying, hey, there’s a liquidity crisis right now. And so when people start to sell their money market funds in mass, right? So if people want just cash, they want to go out and buy bonds or if they want to use it for other things, maybe just to park in cash, it puts a lot of stress on some of these money market funds and it forces them to sell. And sometimes those money market funds can’t find people to actually go and buy those instruments. And so what has happened with this bout of volatility, was that the federal reserve has stepped in and has offered to provide loans to those money market funds that might be suffering from this increase in liquidity or this increase in redemptions where people are asking for their money because they want liquidity.

Tim Maurer:
Interesting. So it’s not so much about your money market account losing money, although we have seen that happen and theoretically I guess you can lose money. It’s about gaining immediate access to your money, is that what you’re saying?

Jonathan Scheid:
That’s predominantly it. Now there’s two main categories of money market funds that we have available to individual investors. There’s government and treasury, that’s one category. And then the other is called prime. In a prime money market, the managers are allowed to invest in what’s called, commercial paper. Think of that is really short term loans to different corporations. And so when there’s market stresses like we’ve seen during this coronavirus contraction, what we see is that people are concerned about the credit worthiness and the ability of those companies to repay. And so sometimes people will move out of those prime instruments into more conservative instruments.

Tim Maurer:
Well, and that begs the question then. If I do want to warehouse cash inside of a money market, what type of money market should it be today? Should it be prime or should it be one of these government varieties where they’re holding government securities inside of the money market?

Jonathan Scheid:
Yeah, so the safest answer is always going to be a government money market, one that holds treasuries and anything that’s either from a government agency, because all of those are going to be backed by the full faith and credit of the United States. So that’s going to be the safest place to put your money. And then on a side note, I would say that majority of advisors and their clients, their clients actually might be having their money swept into a bank sweep account, right, and so that sweep account isn’t an actual money market fund, it is a banking account and those banking accounts are FDAC insured.

Jonathan Scheid:
And so there’s a couple of ways that your money can be placed. So just by us discussing money markets, this may or may not apply to you because you may or may not be using one with your cash investments. And so that that is something to think about as you evaluate your own account in your own situation. But [inaudible] in my perspective, we think that the money market fund space is generally safe and the more safest place to be is on the treasury side.

Tim Maurer:
Well, and it just ties back to our whole fixed income philosophy and the parts of your portfolio that you expect stability from. We recommend utilizing the stablest of investments for those and there can be no more important than what we hold in cash. Thank you, Jonathan Scheid. And thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating the website, askbuckingham.com or by emailing your question to question@askbuckingham.com or just click in the corner of the screen and it’ll take you directly to the website. Remember, there are no dumb questions per se, but unfortunately, there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, it will bring a sense of calm and allowing you to apply what you’ve learned in pursuit of good decision making. So please follow us. And by all means, ask Buckingham.

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