Short-Term Investment Options in Volatile Markets
Greetings from Meridian, and we hope you are all enjoying some slightly warmer weather wherever you are. In Virginia, it feels like we are turning a corner toward Spring, but we might be in for one more cold snap as per usual.
As market volatility increases, so does the temptation to “get out” of the markets until things “feel better.” We have talked about this many times before, but this is akin to timing the market, which has proven to be a fool’s errand.
Nonetheless, there are some good investment options for money that you know you will need in a short period of time. Generally speaking, 2 years or less. The basics of investing tell us that the shorter the timeframe, the more conservative you want to be. You don’t want to be invested in something that is moving up and down and happens to be down the moment you need it for that house down payment, car purchase, etc.
Two common options are money market bank accounts and money market mutual funds. We often hear the generic term “money market account,” but there are some differences in the types of money market options. While both provide liquidity and some level of interest income, they differ in some ways that impact safety, access, and returns.
Money Market Bank Accounts (MMBA)
A money market bank account (MMBA) is a type of deposit account offered by banks and credit unions. It typically offers a higher interest rate than a standard savings or checking account while allowing limited check-writing and debit transactions. Many of the limits on these transactions have been relaxed or eliminated in some cases
One of the key features of MMBAs is that they are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions, typically up to $250,000 per depositor. This means that if the issuing bank defaults, depositors are protected.
Money Market Mutual Funds (MMMF)
A money market mutual fund (MMMF) is an investment product offered by brokerage firms and mutual fund companies. These funds invest in short-term, high-quality debt instruments such as Treasury bills, commercial paper, and certificates of deposit.
Unlike MMBAs, money market funds are not insured, meaning that while they are generally low risk, they do not offer guaranteed protection of principal. Because these funds invest in short-term securities, they can offer slightly higher yields compared to MMBAs, depending on interest rate trends and the fund’s investment choices.
Money market funds also offer liquidity (usually 2 business days from sale to your checking account) and can be accessed with little to no restrictions. They trade at $1 per share, and only two funds in history (from what I could find) have “broken the buck.” Once in 1994 and again during the 2008 financial crisis. Even in those rare cases, investors received most or all their money back.
Recently, both options have offered attractive short-term returns due to the interest rate environment. However, yields have quickly come down from their peaks late last year. A good example is the Schwab Value Advantage Fund (SWVXX). The yield was over 5% in September of last year but now sits at just above 4%. We can see in the chart below that the historical average is about 2.5% since inception (4/30/1992).
Source: Charles Schwab
Don’t Chase 0.1% Interest Rates
One last comment that I have is don’t waste too much of your time chasing an extra .1% or .2% rate on a short-term CD or other instrument. It is probably not worth the time and hassle to open new accounts, change banks/brokerages, etc. For example, if you invest $20,000 in a 1-year CD at 5% vs. a 1-year CD at 5.2%, the difference in interest earned is $40.
Assess the potential timeframe for your money and weigh the risks that you might face with your potential investment. The tradeoff will almost always be safer = lower return and higher risk = higher potential return.
It’s a lot like deciding whether or not you are going to ski down that double-black diamond run. Is taking on that challenge worth the risk of injury vs. being able to tell your friends you did it? (And of course, taking a picture and posting it all over social media!)
Coleman weighing the risks. You can guess what the 15-year-old decided to do.