You now get almost nothing for your money . . . but it could be worse

Having enough cash on hand to pay the bills is always a good idea. But in an economic crisis like this one, with millions unemployed and thousands of businesses in trouble, it’s more desirable than ever.

Plenty of people don’t have a stash of cash. But for those fortunate enough to have salted away some extra money, a pressing question is: where should you keep it?

The standard answer is somewhere safe, like a bank or a money market fund.

But don't expect much in return. Now that the Federal Reserve has committed to keeping short-term interest rates near zero until at least 2022 and the European Central Bank is working along much the same lines, you are likely to earn almost nothing on that money. And that's if everything goes according to plan.

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I’m not talking about a long-term investment; a diversified portfolio containing low-cost index funds that track broad markets would be my own preference for that. This is about a cash reserve for use over, say, the next three to six months, if life becomes cruel or you need to make a big payment for tuition or a car repair.

"Investors like to say 'cash is king'," said Peter Crane, the president of Crane Data of Westborough, Massachusetts, which monitors money market funds. "In the coronavirus crisis, I'd say, cash is bigger than that; it's the emperor of all things. If you ever doubted whether you needed some emergency savings, you probably believe it now."

Financial crisis

I spoke with Crane a decade ago, in the aftermath of the great financial crisis of 2007 to 2009, about the extraordinarily low yields on money market funds. Those rock-bottom, near-zero rates were expected to be temporary but they lasted for years.

Now, he said: “We’re right back where we were then. The economy is in trouble, the Fed has responded and money market funds are paying almost nothing.”

What’s more, many fund companies are already waiving fees. If they didn’t, money market yields would be plunging below zero – in effect, into negative territory. In that event, investors would be paying fund companies for the privilege of holding their money, an absurdity that major mutual funds generally want to avoid.

"That wouldn't be attractive to investors, to say the least," said Joseph Lynagh, who heads the cash management team at T Rowe Price, a big asset management company based in Baltimore. Using the T Rowe government money fund as an example, Lynagh walked me through the company's thinking.

The fund’s current expenses, including administrative and management fees, add up to 0.42 per cent of total assets, a figure that you can find on the company’s website. But when he said that Thursday, the fund’s current gross yield – the income from its investments – was only 0.31 per cent.

“You can infer from that, that without the fee waiver, the fund yield would be negative 0.11 per cent,” he said. In other words, you would give T Rowe Price $1 and one year later, you would have a small fraction of a cent less. That’s not terrible but it’s not a winning proposition.

And, he added, the gap between the T Rowe fund’s income and its expenses is likely to widen the longer this economic crisis continues. That’s because money market fund managers must continually purchase new securities, and these will be paying lower rates than securities purchased before the downturn became acute.

But he expects that the company will swallow those deficits and won’t let its money market yields fall below zero, just as it didn’t during the long period of near-zero short-term rates from 2008 to 2015. The Fed says it intends to avoid negative rates if it can, and so will the money market funds.

After all, money market funds are a competitive $5.2 trillion (€4.6 trillion) business, Crane said. Deep-pocketed companies like T Rowe Price, Vanguard, Fidelity, BlackRock and others are playing a long game. "Even if they are technically entitled to charge investors – or recoup waived fees later – they generally don't want to do it," he said. "It would hurt their reputation too much."

That doesn’t mean that they wouldn’t do it.

In fact, as Daniel Wiener, an investment adviser and newsletter editor, told me, one outfit has put investors on notice that it intends to recoup waived fees down the road, as it did after the last financial crisis. That is TIAA, the company that runs the nonprofit Cref. These alphabet soup abbreviations reflect the history of the company: TIAA stands for Teachers Insurance and Annuity Association of America; Cref for College Retirement Equities Fund.

In a statement, TIAA said its Cref money market account is required by regulators to recoup losses, which it is now incurring. The fund does “not generate any profits to fund expense waivers,” and must “recoup a portion of waived fees” down the road, it said.

Chad Peterson, a TIAA spokesman, said Cref provides retirement accounts for "people in higher education, the nonprofit community, teaching hospitals" and the like.

Higher risk

Given a choice – and countless mutual fund companies, as well as TIAA, offer other money market funds that don’t seek to recoup these fees – I’d avoid this fund.

Crane says he would stay away from funds with the very highest yields. “Higher yield probably means higher risk,” he said. At the moment, he said, a yield of just 0.5 per cent “is already in nosebleed territory”.

For a safe place to keep your cash, he suggested that you consider government money market funds, which, as the name implies, hold government securities. They are “golden in a deep crisis,” like the one that required Federal Reserve intervention in March, as well as back in 2007-08, Crane said. “Prime funds,” which can hold commercial securities, may be less liquid when the going gets rough.

But prime funds are a reasonable choice, too. They have been quite safe compared with mutual funds that hold stocks or bonds and often lose large amounts of money. Even in the worst case of the last 20 years, in which one fund lost money for investors, the losses amounted in the end to only 1 cent on the dollar. “That’s not a lot to worry about,” Lynagh said.

For even greater security, consider a bank account with Federal Deposit Insurance Corp backing, which guarantees up to $250,000 (€222,000). Accounts from old-fashioned banks with brick and mortar branches, as well as higher-yielding online-only enterprises, carry FDIC insurance, and their rates are tracked by the website Bankrate. com. In periods of extremely low market interest rates, like this one, some online bank accounts have higher rates than money market funds do, reversing the typical relationship. The banks' advantage may not last, but as long as the accounts are fully insured, there's little risk in exploiting it.

Safety is the main issue, when you’re looking for a place to keep your cash.

“Don’t worry so much about the return on your money,” Crane said. “Worry about the return of your money.”

It’s not easy to amass a cash fund these days. If you’re lucky enough to have done it, be sure to read the fine print. That will help you avoid losses, including negative interest.

– New York Times