Over the long haul, the stock market has historically provided roughly an 8 % return per year. This is a statistic that has been tracked since the Great Depression of 1929. However, during this period of time, we have seen some major bear markets with spikes downward. One of these downward spikes which has been extremely evident, occurred recently during the turbulent financial credit crisis of 2008. It certainly is not mandatory for investors to remain in stocks during these horrific financial times, as there are other safer instruments that are available and should be utilized during these periods of uncertainty.
Money market instruments are an excellent and viable choice during these volatile times, to help preserve capital, and to provide almost instantaneous access to these funds (usually you can gain access within 2-3 business days), should the need arise. By definition, money market instruments are short-term debt securities (which typically mature in under one year), and are typically considered to be almost equivalent to cash, since you can liquidate them quickly to “cash out”. Money market instruments are usually considered to be very safe instruments, and are usually issued by financial institutions, mega-corporations, or by the U.S. government itself. For the consumer, the quickest way to gain access to these investment vehicles, are through money market mutual funds through your brokerage account, or via money market bank accounts.
Historically, money market rates have increased and decreased in unison with shifts of government fiscal policy and resultant interest rates. In the last 20 years, we have seen money market rates in excess of 6 %, and as low as close to 0 %. With interest rates at the low end of the historical curve these days, money market instruments are at their historical lower end. It should be noted that money markets always maintain a $ 1 per share cost, and issue interest on this per share basis.
Although most money market funds issues by government or big corporations are typically not guaranteed, most issued by banks are typically FDIC-insured, which makes them backed by the Federal government. Specifically, these are the ideal money markets to invest in. Although non-bank issued funds have been historically uninsured, since the mammoth financial credit crisis of 2008, the government is now guaranteeing them for the next year (at least), with a dedicated $ 50 billion dollar emergency pool. This guarantee was devised since a well-known money market mutual fund (the Reserve Primary Fund), broke the sacred $ 1 per share paid by investors of this fund. Since the fund was unable to cash out investors who requested liquidations, due to the fund’s exposure to failing Lehman Brothers’ Holdings debt, the government stepped in to calm the anxiety of money market investors (currently, over $ 3.3 trillion is invested in these funds in the U.S.). This was only the second time in U.S. history that the “breaking of the buck” had ever occurred.
Given the government’s assurance that all money market funds will be guaranteed by the government for the foreseeable future, and that most bank-issued funds are insured by the FDIC to the new limits of $ 250,000 ($ 500,000 for joint account holders), these instruments offer an excellent, liquid place to park one’s money, during trying, turbulent financial market times. Although you will not see gains in money markets like you will see gains in stock market index funds (over the long haul), the use of these instruments provide an excellent vehicle for cash preservation for those who need cash in the short-term, and/or for those looking to preserve their capital in a downward-spiking financial market.