Cliff Pletschet
Personal finance columnist Cliff Pletschet has been writing about investing for more
than 20 years. Pletschet, who began as a journalist for the Oakland Tribune in
1958, has made it his mission to make independent investors out of dependent
investors. Pletschet and his wife established Personal Investment Education to
provide classes, seminars and a bi-monthly newsletter, Investment Educator. For
more information, contact Pletschet at www.investment-educator.com or call
1-510-531-5620.
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Mr. Pletschet is not affiliated with, nor compensated
by, U.S. Global Investors.
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On October 17, 2001, assets in money market mutual funds (popularly called "money
funds") reached a record high of $2.2 trillion, a staggering figure, but particularly awesome
when one considers that money funds didn’t even exist 27 years ago.
Money funds have done more to convert bank savers into investors than any other investment
product. Savers were first attracted by the higher yields and once they were in the transition
to stock funds and individual stocks became easy. The fact that the stock market took off in
1982 and hardly looked back certainly helped.
A creative public has come to put money funds to many uses. These include:
--Portfolio diversification. Every portfolio should have some money in "cash equivalents".
--As a launching pad for someone who has only $1,000 or so to start a portfolio.
--A "green curb" is a principal-protecting temporary parking place for money.
--An "escape hatch" in a family of stock funds, allowing the investor to escape from the stock market with one phone call.
--As a "sweep tank," allowing owners of stocks and bonds to sweep income into a money fund in their account, with that money embargoed for later purchases of stocks and bonds.
--Special funds for special uses. Some funds serve as clones for bank accounts. Others are tax-exempt on state and federal returns, allowing persons in high tax brackets a tax break.
A money fund can be a very handy tool when it comes to regular savings. Many funds allow
shareholders to route money directly from their bank account, amounting to a saving program
that is "out-of-sight and out-of-mind." Most savers need that kind of discipline.
Many investors will have money in at least two funds – one in their brokerage account and
one on the outside. Their broker may allow four or five choices, so the decision-making there
is limited. On the outside, the number of choices are staggering -- at least 1,500 funds. The
best mutual fund table was carried in Barron’s weekly, but Barron’s now refers readers to its
web site, www.barrons.com/data.
Pletschet at www.The best way to chose a fund, in my view, is to pick one that is: 1) consistently among the
top 10 or so funds in offering a seven-day compound yield, and 2) my choice would also be
a fund that carries nothing but Treasury securities and certain government agency securities.
Such funds offer added protection and their income is exempt from state taxes.
For those who might not know, a money fund manager lends shareholders’ money in the
money market and returns interest income to those shareholders after extracting a tiny management
fee. Since no money fund imposes a sales charge (that is, all are "no-load") a money
fund is the best buy an investor can make.
What is the "money market?" Well, it’s an informal system of short-term borrowing by banks,
corporations and the U.S. government. The fund managers spread money around for diversification,
and these borrowers issue IOUs (certificates of deposit by banks, Treasury bills by
the Government, and commercial paper by corporations). These IOUs come due in about 90
days. Shares are held for simply $1 each, with all income distributed daily.
Since a money fund is so diverse and the maturities of its investments so short, it is quite
secure. It is not guaranteed by government insurance, but with very few exceptions no money
fund has stumbled. The Securities and Exchange Commission holds a tight rein on money
funds, in view of the public’s affection for them. Federal Reserve rate reductions have cut
rates to their lowest levels in many years. But they will rise again.
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Investment Professionals 