VMFXX questions

[bpage12]

Is Vanguard Federal Money Market Fund a good place to keep cash?  It looks like it is getting 4.75%.

Is it just like a savings account in Vanguard until you are ready to use your money on investments?
Can it go down in value?

[MustacheAndaHalf]

Is Vanguard Federal Money Market Fund a good place to keep cash?  It looks like it is getting 4.75%.

Is it just like a savings account in Vanguard until you are ready to use your money on investments?
Can it go down in value?

Vanguard Federal Money Market Fund (VMFXX) is most people's "settlement fund".  When you sell mutual funds or ETFs, there is a delay while the trade settles - and then that cash winds up in your settlement fund.

Vanguard's Federal Money Market Fund should be the absolute safest investment.  It holds short term obligations of the Federal government, which means even if we had another 2008 crisis, Vanguard's fund would not break the bank.  If you want to dig into the history and scare yourself, one money market fund had to be liquidated back in the 2008 crisis (assets worth $0.99/share, but panic caused The Reserve Fund to be sold early for $0.97/share).  I think it has happened twice in history, and never to a money market fund with Federal obligations like Vanguard Federal MMF.
https://www.investopedia.com/terms/b/breaking-the-buck.asp

Because my other investments are very high risk and illiquid, I keep a lot of money in Vanguard Federal Money Market Fund.  When I invest money outside Vanguard, I can transfer the money out of VMFXX quickly, but also earn a good interest rate while I wait.  Your phrase "like a savings account in Vanguard" is a good description.

[habanero]

Next to buying 1 month T-bills, this fund is as defensive as its posssible to get. The credit risk is all federal (i.e zero) and the duration is very very short so interest rate sensitivity is pretty much as low as you can get.

As a foreigner I find it deeply fascinating that an astonishing number of US citizens have meaningful amounts of money in a savings account paying zero interest while alternatives such as this exists or you can buy t-bills directly on-line on treasurydirect.gov.

[ATtiny85]

Is Vanguard Federal Money Market Fund a good place to keep cash?  It looks like it is getting 4.75%.

Is it just like a savings account in Vanguard until you are ready to use your money on investments?
Can it go down in value?

What does the highlighted phrase mean? For me, I am ready the moment I have the money. Actually, I am ready way in advance of having the money.

I suppose due to some minimum initial investments, there could be reason, but I thought that was pretty easy to bypass with auto investments.

[EliteZags]

Is Vanguard Federal Money Market Fund a good place to keep cash?  It looks like it is getting 4.75%.

Is it just like a savings account in Vanguard until you are ready to use your money on investments?
Can it go down in value?

What does the highlighted phrase mean? For me, I am ready the moment I have the money. Actually, I am ready way in advance of having the money.

I suppose due to some minimum initial investments, there could be reason, but I thought that was pretty easy to bypass with auto investments.

you have trouble understanding that there may be people that prefer any investing strategy other than immediate buying of index funds with every available dollar as soon as they're accessible?

[ATtiny85]

Is Vanguard Federal Money Market Fund a good place to keep cash?  It looks like it is getting 4.75%.

Is it just like a savings account in Vanguard until you are ready to use your money on investments?
Can it go down in value?

What does the highlighted phrase mean? For me, I am ready the moment I have the money. Actually, I am ready way in advance of having the money.

I suppose due to some minimum initial investments, there could be reason, but I thought that was pretty easy to bypass with auto investments.

you have trouble understanding that there may be people that prefer any investing strategy other than immediate buying of index funds with every available dollar as soon as they're accessible?

If they ask somewhat basic questions, then I like to ask some questions. The earlier we can get at potential behavioral problems, the better the chance we have of setting them on a good path.

Depending on the answer, I may say “woah, hang on, let’s talk” or I may say “OK, great, thanks for the clarification”.

[EliteZags]

the way you phrased it just made it sound like you were confused/baffled that anyone could ever want to invest in any way other than what this community has been raised on

[bpage12]

Thanks everyone!  That was very helpful.  Just seemed to easy to put money in the settlement fund and get 4.75% so I just wanted to make sure that was correct.

Sometimes I will sell a stock and not immediately purchase another investment right away so I wanted to make sure while the money sat there it was earning good interest.

Thank you guys for the help!!

[EscapeVelocity2020]

Edit to add - Just saw MustacheAndAHalf also had a similar post.  Serves me right for glancing at a thread, not commenting, then coming back. 

Not sure if you are still reading, but I meant to post a couple of thoughts.  First, the 7 day SEC yield is good now, but it can change relatively quickly, so if you want to 'lock in' 4.75% you'll have to commit to an investment.  Here's where you can find some similarly safe yields with more duration - https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Also, there was a brief time in 2008 when Money Markets 'broke the buck'.  That was an exceptional time, but a reminder that it can happen.

[bpage12]

I am still reading.  Thanks for the response.  I have extra money sitting in savings not making much interest so that was my main concern.  VMFXX is so much better.  Thanks for pointing out other short term bond and treasuries as well.  I appreciate you guys.

[habanero]

I am still reading.  Thanks for the response.  I have extra money sitting in savings not making much interest so that was my main concern.  VMFXX is so much better.  Thanks for pointing out other short term bond and treasuries as well.  I appreciate you guys.

US treasuries/T-bills are viewed as risk-free investments, but that really only means "free of default risk". The longer the duration the more interest rate sensitivity (aka duration risk) and regular treasuries also comes with inflation risk. Very short term bills/treasuries minimize the interest rate sensitivity and will generally follow the Fed rate closely. So you get the befenfit of increased rates pretty quickly, but the flipside is that your yield willl go down when interest rates go down as well. Buying VMFXX will be very close to buying 1 month t-bills every month and just roll into the next one when the current matures.

[secondcor521]

Another thing to be aware of.

I don't exactly understand why, but the SEC yield listed for VMFXX is not what you'll actually get paid.  When I was looking at it, the SEC yield listed was 4.7% but the previous month, if I took the actual dividends paid divided by the amount invested, the math worked out to about 4.2%.

Perhaps there is some sort of lag effect (this was in February/March when rates on Treasuries was still rising), or perhaps the SEC yield calculated isn't accurate.

Still a nice return on a safe investment, but if you're looking at other fixed income options like CDs, it's something worth knowing about and investigating.

[ChpBstrd]

TD Ameritrade does not seem to encourage the purchase of VMFXX. On my screen, all I see are the 0.11% expense ratio, a $3k minimum investment except in IRAs, a 2.63% TTM distribution yield, and a 0% SEC 30-day yield.

Superficially, that doesn't look as attractive as just buying t-bills, now at 5.1% for the four-month duration or the easier to handle ETF SGOV with a 30d yield of 4.64%, or CLTL with a lower expense ratio than the Vanguard fund and a 4.54% 30d yield.

But I get the point. Rates have risen, past info is not applicable any more, and the future yield will be higher. This is just a cautionary tale about shopping for safe money funds through your brokerage based on the numbers displayed. When rates are a-rockin' you can't take the yield field at face value.

[habanero]

VMFXX invests only in US T-bills/ treasuries with short remaining maturity and repo agreements with US treasuries as sole collateral so reutrns should be very similar to direct investment in the same securities. From the viewpoint of a private investor with in this context limited savings the liquidity in VMFXX or direct investment in short-term government debt will for all practical purposes have infinite liquidity so conversion to cash at any point should be a breeze but settlement can probably be a coupld of days after a sale (I dont live in the US so I have no personal experience with either but 2 day settlement is pretty standard in the underlying markets at least).