Posts tagged cash

Treasury Money Market Fund rates are about 0% today. Many may think this is a reason to chase after some higher yield. My advice: Don’t.

In 2008 when the credit crisis hit it was the higher yielding assets in many money market funds that faced problems. Some of these funds broke the buck. Others dealt out large losses to customers. The slight extra yield being received over the years was met with a quick evaporation of principal in some cases, freezing of redemptions in others, or just a nail biting experience watching it all happen. Was the extra percent or so a year worth it?

It could have been worse, you just weren’t being made aware of the problem (H/T Nisiprius on Bogleheads):

’08 data show Hub firms in grip of panic

The level of panic in the money market industry in the fall of 2008 was much greater than previously disclosed, with many Boston firms tapping into billions of dollars the US central bank made available to avoid further financial chaos, data released this week show.

Nationwide, nearly 200 money market funds tapped into the Federal Reserve Bank’s program, with much of the $217 billion gushing out over five brisk days in late September that year. Bank of America Corp.’s Boston-based Columbia money market funds tapped $13 billion, the Evergreen Funds used $9 billion, and Fidelity Investments sought $5.5 billion, among many others, according to the Fed data released this week.

If you own Treasury Money Market funds you will never have to face these issues barring total implosion of the US Govt. There is no need to worry about FDIC or if the assets underneath are going to be liquid in a crisis. US Treasury securities are one of the most liquid assets on the planet. FDIC is not needed because if the Treasury can’t pay you on the T-Bills then FDIC is kaput anyway.

It’s not a good idea to chase yield with short-term cash reserves. I’d want to keep that money in the safest form I can find and take risks on the other parts of the investment portfolio if I need more growth. That’s why Harry Browne always advised holding your cash in a US Treasury Money Market Fund that only held 100% US Treasuries. If you did this in 2008 you faced no problems and no sleepless nights.

What about reaching for some yield? Couldn’t an investor react on the onset of a crisis and move the money out someplace safer? No, I don’t think so. Things can happen so quickly in the markets you’ll have no time to react. You’ll just be one of many people running for the exits. But the exits may be chained shut.

Of course it’s the eternal battle in the investing world:

1) Higher Returns
2) Safety

Chose one. 

For cash I think Safety is #1. If I want to risk more returns I’ll split my cash between a Treasury Money Market fund and a Treasury Short Term Bond Fund (average 1-3 years maturity). This can give more yield without compromising the cash safety too badly (it introduces slightly more interest rate risk).

I read about people moving money around into CDs at shaky banks hoping to rake in some extra interest and get paid off if FDIC comes to bail things out. There is a piece of me that hopes they get their rear ends handed to them. It’s like getting into a car with a drunk driver because you think the air bags are going to save you if it wrecks. Me? I’d rather not get in the vehicle.

But the odd thing about this behavior is they obviously are keeping this cash around for some kind of short-term purpose (otherwise why not just buy stocks that have a better chance of higher returns?). It’s like they have a split personality that knows they want cash, but just can’t come to grips with the idea that it won’t return as much. So they pursue these strategies that are risky, but have somehow convinced themselves that because it’s “Cash” it’s not really risky at all even though they are doing some pretty hairy things. I don’t get it.

Don’t fall into this trap. Keep your cash in a Treasury Money Market fund and you eliminate a whole raft of potential problems. The rest of the Permanent Portfolio can drive the returns so there is no need to sweat chasing yield with your cash.