Money market funds have displaced stock and bond investments in many portfolios, as a recent Wall Street Journal article discusses:
“With markets rocky and cash earning 5% or more, investors have boosted their holdings of money-market funds to a near-record $5.6 trillion, according to the Investment Company Institute. Both individuals and institutional investors are piling in – asset managers now have roughly one-fifth of their portfolios in money-market funds, State Street data show.”
Although the author doesn’t make the distinction explicitly, he’s referring to “purchased” money market funds (PMMFs), which are bought and sold like mutual funds. There are taxable and tax-exempt PMMFs, with the taxable type currently yielding in the 5.3% range and the tax-exempt yielding around 3.7%.
The other type of money market fund is the “sweep” variety, where dividend and interest income earned in brokerage accounts gets “swept” on a daily basis. Sweep MMFs yield about 0.5% these days.
The article goes on to discuss how money markets have “fees, taxes and inflation [that] all undermine those returns. And one of the biggest costs is opportunity: By pouring money into cash, investors miss out on potential gains from holding a broad portfolio of stocks, bonds and other riskier investments.”
Park Piedmont agrees that fees, taxes, and inflation are risks, but they’re present for most fixed-income investments, not just Purchased Money Market Funds (PMMFs).
One of the benefits of PMMFs not mentioned is that they typically don’t change in price from $1 per share, unlike bond funds, which have decreased in overall value this year, despite higher yields, because prices have declined.
This is also a benefit of short-term Treasury bills, which Park Piedmont has started using for client accounts as a complement to longer-term bond funds.
The T-bills also have high current yields, ranging from about 5.5% for 3-month bills to 5.6% for 6-month bills. And if you hold them to maturity, which is relatively easy given the short terms, there are typically no price changes, either up or down.
But the main point is that PMMFs and Treasuries should be part of a balanced, long-term oriented portfolio.
Moving all or even most assets into a “hot” fund or sector represents an attempt to time the markets, which most academic research shows is impossible to do successfully long-term.
Park Piedmont uses PMMFs and short-term Treasuries as potential substitutes for other fixed income investments like bond funds – not for stocks or other investments with different risk characteristics.
An example of changing the mix of the fixed income part of a portfolio is tax-loss harvesting, where bond funds are sold to realize tax benefits and the sale proceeds are invested in PMMFs and T-bills to maintain the overall asset allocation.
Park Piedmont helped many clients with such loss harvesting in 2022, and we will be checking in with clients regarding possible similar opportunities to maintain overall portfolio balance in 2023.