Chasing Yield will Get You Burned

July 11, 2011

“More money has been lost reaching for yield than at the point of a gun.”
~ (I believe first attributed to) Raymond F. DeVoe, Jr.

 

I don’t envy the financial press.

 

For as much thought that a simple blog takes for me, to have to find new topics to discuss on an almost daily basis is something I do not envy.

 

But there is one aspect of the press, and I’ll include blogs, articles, and radio programs by professionals, that bothers me recently.

 

Over the last few weeks, where we are witnessing a concern for money market funds – a client’s supposedly ‘safe’ money – there has been an overwhelming number of requests, articles, and news stories, on how to earn just a little bit more on your cash and money market accounts.

 

The motives, like always, are to strike at your fear of losing money in a fund with exposure to Greece, or greed for not earning as much as the other guy.

 

And while the stories are often separate, I see them as the same. You can either ‘reach for’ just a little more yield, and ignore that to earn that yield you might put your money at risk. Likewise, people that are at risk now were likely reaching for yield (or their advisor was) to avoid the fact that safe money doesn’t pay right now.

 

The amount of information I see from both the fear mongering group, and those appealing to investors greed to take more risk with your money market funds is what is frightening to this amateur financial writer.

 

As I see the world, there are a few reasons to own a money market mutual fund:

  • To provide stability

  • To preserve your principal for known or unknown emergency cash needs

  • To allow for risk taking in investments that historically reward you to take on risk

None of the above are accomplished by risking your principal for just a little more in yield. It simply doesn’t make sense to gamble your safe money for a minor amount of extra yield.

 

And so, as these stories come out about the investments that will pay you a few pennies more to place your money at risk, and as you hear marketing pitches at how certain advisors had the foresight to move out of these risky funds, I recommend tuning out the news for the most part, and considering a simple investment principle:

 

In order to earn a higher investment yield, you must take on more risk.

 

Don’t invest the money you need to be absolutely and completely safe and stable. Seek an FDIC-insured account for your non-investment funds. For the rest, if you have an advisor, ask if your money market accounts are of the highest quality.

 

Take the focus off of yield; that isn’t the reason you hold a money market fund. It might mean won’t earn that extra 0.10% per year higher risk funds pay right now, but you won’t have to worry about losing principal.

 

The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site

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