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Money markets doing just swell

Updated: May 3, 2013 12:14PM

There's a huge pool of money sitting in money-market funds these days -- and given recent market volatility, it looks as if there will be a whole lot more flooding in.

At the end of last week, according to, a record $2.14 trillion sat in all types of taxable money market funds -- mutual funds that invest in short-term, high-quality securities, such as Treasury bills, bank CDs and corporate IOUs. More than one-third of that amount came from individual investors. Record money-market funds

This week the total in money market funds is likely to jump to a record high. According to TrimTabs, which estimates mutual fund cash flows, $5.5 billion flowed out of equity funds last Tuesday, and another $4.5 billion bailed out of domestic equity funds on Thursday. Friday's figures were not available, but presumably followed the trend.

Most of those outflows from equity funds are looking for safety. And for now, safety has a pretty good return. Of course, as people rush to buy safety, yields will fall.

Last week the seven-day average annual yield on all money market funds rose to 3.07 percent. But many money market funds are now yielding nearly 5 percent. At ( you can find a list of a dozen government securities money market funds, including funds from leading names such as Fidelity and Vanguard with yields at or near 5 percent.

Note: Not all money market funds are exactly alike. They all hold securities with maturities of less than a year, but some hold only Treasury securities, while others diversify into government agency paper or even commercial paper. Those with the slightly more "risky" paper carry yields that might be 40 or 50 basis points higher than Treasury-only money funds. While money market mutual funds are not FDIC insured, their liquidity and high quality investments make them a safe haven for your cash.

There are two ways to look at the huge stash of cash sitting in money market mutual funds. The pros call it a bullish sign. According to Charles Biderman, CEO of TrimTabs, all that cash on the sidelines is a very bullish signal.

He points out that during the period of June 2002 through February 2003, more than $100 billion flowed out of equity mutual funds. The worst week for outflows came in July 2002 when $19 billion fled stock funds, and presumably into "safer" investments such as money market funds.

That huge one-week decline came just as the market bottomed! The equity fund investors who jumped ship did so at exactly the wrong time.

On the other hand, no one knows until hindsight how far down a market correction will go or how long it will last. Those who are overweighted in stocks or stock market mutual funds have two choices: reduce your equity holdings by selling now, or let the market do it for you. On that basis, many investors have decided that selling in a down market is better than waiting around to watch their portfolios dwindle. That's historically an unwise reaction.A haven for chicken money

Years ago I coined the term "chicken money" to refer to assets investors are too chicken to risk, so the money ends up in money market mutual funds, money market funds at banks, Treasury bills and short-term bank CDs.

You won't get rich with these investments -- but you won't get poor either! They should just about keep up with inflation, after taxes. And letting a portion of your assets sit in chicken money during rising markets means that you never have to pick tops or bottoms. And you can sleep well during market declines. And that's the Savage Truth.

Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at, and click on Business. Distributed by Creators Syndicate.

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