Author Topic: Vanguard money market fund: risk to principal?  (Read 6975 times)

blub

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Vanguard money market fund: risk to principal?
« on: July 24, 2014, 01:14:44 PM »
If the market were to tank tomorrow, and I only held a money market fund (e.g. VMMXX) in my Vanguard account, should I expect my money market holdings to retain their value? My understanding is that this is the closest thing to cash that you can hold in a Vanguard account.  Is that accurate?

gimp

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Re: Vanguard money market fund: risk to principal?
« Reply #1 on: July 24, 2014, 02:10:32 PM »
Yes.

dragoncar

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Re: Vanguard money market fund: risk to principal?
« Reply #2 on: July 24, 2014, 02:20:34 PM »
http://touch.investmentnews.com/smartphone/article?cat=redirected&arturl=/article/20140723/FREE/140729961

There are different kinds of money market funds... I'd specifically ask vanguard if your sweep fund is FDIC insured.

CanuckExpat

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Re: Vanguard money market fund: risk to principal?
« Reply #3 on: July 24, 2014, 02:56:03 PM »
Money market funds are not FDIC insured, they are relatively stable (even in 08 crash) but are not guaranteed:
http://www.investopedia.com/articles/mutualfund/08/money-market-break-buck.asp

dragoncar

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Re: Vanguard money market fund: risk to principal?
« Reply #4 on: July 24, 2014, 03:17:11 PM »
Money market funds are not FDIC insured, they are relatively stable (even in 08 crash) but are not guaranteed:
http://www.investopedia.com/articles/mutualfund/08/money-market-break-buck.asp

They aren't, but money market savings accounts are.  Also, most brokerages offer FDIC insured sweep options.  The rates suck but, well, so do the rates for MM funds so what do you have to lose?

ect

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Re: Vanguard money market fund: risk to principal?
« Reply #5 on: July 24, 2014, 07:12:48 PM »
Also, most brokerages offer FDIC insured sweep options.

True, but Vanguard does not.

Vanguard has two very low-risk money-market funds holding US government-only securities, but they're both closed to new investors.

VMMXX is not risk-free, but your balance would likely only be vulnerable in the event of an unprecedented financial market meltdown.

When the Fed finally allows rates to rise above zero, Vanguard will presumably lift its restrictions, but that doesn't seem to be on the immediate horizon.

hodedofome

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Re: Vanguard money market fund: risk to principal?
« Reply #6 on: July 25, 2014, 01:50:01 PM »
You can look at BIL or SHY etf's, both are very short duration US treasury bonds (in SHY) or treasury bills (in BIL). FWIW I use SHY as the 'cash' portion in my portfolios.

After what happened in '08, I stay away from money market funds.

You don't ever want to hold cash in a brokerage account. When broker's have gone bankrupt in the past, those with cash in their accounts were lucky to get anything back, if they got anything at all. But if all your account is in a security like BIL or SHY, you will be made whole. ETFs, mutual funds, stocks and bonds are in your name and no broker can steal that from you. There's a reason it's called a SECURITY!
« Last Edit: July 25, 2014, 02:02:47 PM by hodedofome »

ect

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Re: Vanguard money market fund: risk to principal?
« Reply #7 on: July 25, 2014, 01:59:53 PM »
You can look at BIL or SHY etf's, both are very short duration US treasury bonds (in SHY) or treasury bills (in BIL).

After what happened in '08, I stay away from money market funds.

I like that advice. If you want a mutual fund rather than an etf, Vanguard has VFISX (Short-Term Treasury), currently yielding 0.42%. Average duration is 2.2 years.

La Bibliotecaria Feroz

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Re: Vanguard money market fund: risk to principal?
« Reply #8 on: July 25, 2014, 02:31:06 PM »
I used to use my Vanguard MM for parking money in--you know, my emergency fund-type money--but the returns suck. I do much better with an Ally savings account. You can link everything online these days. I see little to no reason to keep money in a money market account.

CanuckExpat

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Re: Vanguard money market fund: risk to principal?
« Reply #9 on: July 25, 2014, 02:34:50 PM »
More basic question, in this day and age why would you need to hold cash or an equivalent (money market, short term treasury bills as suggested, etc) in your investment account at all?
I can imagine there might be a need for institutional investors, but I feel like for individual investors this is a remnant of the days before electronic fund transfers.

For example, with Vanguard I can have my dividends and capitals gains from a taxable account swept directly into my regular FDIC insured savings account, which earns higher interest than the money market or short term treasuries. Similarly I can make a purchase at today's price and the required amount will automatically be debited from said same account.

pdxvandal

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Re: Vanguard money market fund: risk to principal?
« Reply #10 on: July 26, 2014, 10:26:20 PM »
The Vanguard MM account is great if you invest in ETFs. I've had 2-3k in there the past few months and shift $500-$1,000 into a few ETFs when the market drops 0.5-2% in a day. Easy peasy. But yes, the MM returns are awful and I wouldn't advise keeping your emergency fund there.

ect

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Re: Vanguard money market fund: risk to principal?
« Reply #11 on: July 27, 2014, 10:41:20 AM »
I used to use my Vanguard MM for parking money in--you know, my emergency fund-type money--but the returns suck. I do much better with an Ally savings account.

This is not a huge factor, but Vanguard's pricing and services are tiered to incentivize larger balances. For example, accounts below $50,000 are charged $20 per stock trade (after the first 25), whereas accounts above $500,000 are charged only $2 per trade.

I keep most of my cash in Vanguard's Admiral Treasury/VUSXX (0.01%), but if they limited me to VMMXX as my only money-market option, I would more strongly consider a bank savings account such as Ally (0.87%) or Barclays (0.90%).

La Bibliotecaria Feroz

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Re: Vanguard money market fund: risk to principal?
« Reply #12 on: July 27, 2014, 01:20:31 PM »
I used to use my Vanguard MM for parking money in--you know, my emergency fund-type money--but the returns suck. I do much better with an Ally savings account.

This is not a huge factor, but Vanguard's pricing and services are tiered to incentivize larger balances. For example, accounts below $50,000 are charged $20 per stock trade (after the first 25), whereas accounts above $500,000 are charged only $2 per trade.

I keep most of my cash in Vanguard's Admiral Treasury/VUSXX (0.01%), but if they limited me to VMMXX as my only money-market option, I would more strongly consider a bank savings account such as Ally (0.87%) or Barclays (0.90%).

Good to know. I actually have Flagship status through my grandfather, the original Millionaire Next Door, and have never had more than a few thousand in cash, but it's good to know that there are other options. Someday I want to be the matriarch bestowing Flagship service on all my progeny!

ect

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Re: Vanguard money market fund: risk to principal?
« Reply #13 on: July 27, 2014, 02:22:51 PM »
Someday I want to be the matriarch bestowing Flagship service on all my progeny!

Nice! The personal representative becomes available at that level, plus some free trades and complimentary tax prep software.