Thursday, September 1, 2011

Investment Guaranteed to Pay Zero for the Next 3 Years. Want It?

For most of the last three years, the rate of interest in money market mutual funds has been zero, especially US Government Money Market Funds. Fund managers and investors were hanging on, thinking that the Federal Reserve would start raising interest rates and make money market mutual funds viable once again. Most people who own these funds do not know of a provision granted to fund managers by the SEC. This provision is called the “claw back” provision. The benefit to the fund companies is that when the funds reach the point that the yield is greater than the cost to run the fund, the managers who have been waiving their management fees can start collecting fees for the most recent three years.

I have been saying that we are in a Japan-style recover, in that we have low growth, high unemployment and, most devastating of all, especially to seniors, low to zero interest. Until two weeks ago, hope still abounded that the Fed would increase interest rates soon. The Chairman of the Federal Reserve said, in no uncertain terms, that the Fed would keep interest rates at the current level until at least the 2nd quarter of 2013, two years from now.  By the end of that week, Merrill Lynch said that they thought it will be, “at least 2014.”

If you have money in a money market mutual fund, you can expect to earn zero return for the next two to three years if you stay in the fund. If you have been in the fund since the end of the third quarter of 2008, your return has been zero. If you stay and Merrill is right, you will be looking at 6 years of zero return, guaranteed.

Many say, “At least I will not be losing money.” Au contraire.  Just look at the chart below of the CPI from the end of 2007 to July 2011. If you do the math, the loss in real value would have been 5% of your money to inflation. If you started 2008 with $10,000 in a US Government money market mutual fund, three years later you lost $500 of purchasing power. If, in fact, the Fed is on hold for two more years and you stay in the fund and inflation stays the same as it has been for the last 3 years, your loss in real dollar terms could approach $800. Yes, Virginia, there is a Santa Claus and you can’t lose money in a money market mutual funds are both myths rather than fact.
I have had clients contacting me asking for advice for friends and family who were living off the interest in money market funds and social security and who are now having to spend their assets to pay their bills because the fund pays no interest. My greatest fear for millions of Americans is that they are reaching the point that two to three more years of no return will be devastating to their lifestyle and the quality of life they will have going forward.

The banks have seen significant inflows of deposits because they are paying better interest rates than the money market funds. The banks find themselves flush with cash and are trying to discourage deposits by dropping interest rates. (Go to and look at the declines) Banks are taking it in much faster than they can loan it out. I know of one money center bank that said it,“Needs to reduce deposits by $2 billion.”

I realize that all of us need some money invested short-term, but not the amount that is currently invested in money funds. Those of you who are my clients know that the title of this blog is exactly how I manage money for them. Money has to be working for you all the time; your money has to be in motion. Earning zero percent on a money market mutual fund is not money in motion and when you adjust for inflation, you are really losing money.

I know that this blog gets circulated many times by the people I send it to. If you are a second-hand reader and need help or know of someone who needs help, send me an e-mail.

Dan Perkins

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