Would I be crazy to invest in a money market account now?
October 7, 2008 3:39 PM   Subscribe

I want to invest, but I'm a little wary, is a money market the right choice for me?

I'm an extremely lucky person. I'm a recent college graduate with no student loans due to a scholarship, and no credit card debt due to having a frugal accountant for a mother. I'm employed with a 401K, but have no savings beyond the few months I've been paying into it.

I'm not one to really spend much money on things I don't need, and my rent is relatively cheap since I have a roommate. As a result, I've been accumulating a good bit of cash in my checking account. My parents have advised me that it might be a good idea to invest in a money market account since they are traditionally very low risk. However I'm feeling apprehensive in this economy.

I understand this is a great time to buy, but I don't fully understand what a money market fund is or how it works. Could someone enlighten me?
posted by DrDreidel to Work & Money (10 answers total) 5 users marked this as a favorite
This is what financial planners are for, you're young and you have some amount of disposable income you'd like to direct towards a longer term investment strategy.

So a few basics to review that are scattered around a lot of threads:

1) Contact a financial planner, this person should be drawing up a number of things for you - asset/liabilities worksheets, cashflow worksheets, etc.

2) A financial planner will talk to you about your short and long term goals and about how tolerant to risk you are. They can then take this risk and offer you an investment strategy, this consultation is usually free and without obligation. Seek several opinions and spend some time talking with them, anyone who won't take the time to talk to you about this isn't worth your time.

3) Based on the consultation with the financial planner they will likely talk to you about several types of accounts or financial vehicles (they should talk to you about several, if they don't big warning sign): IRA's, 401k's, 403's, what a ROTH account is, if you should consider insurance and how much, etc. Education is the name of the game.

4) Based on this continued discussion they will most likely recommend some investment vehicles available via their company. I have no strong opinions which are better, commission or cost basis options, but there will likely be lots of them

5) Your company, as it offers a 401k, likely managed via another company (Fidelity, Edward Jones/etc) will probably offer all of the above as part of the services they provide in line with the 401k plan, you are under no obligation outside of the 401k to use them. Multiple opinions and education is the name of the game as stated above.

6) Be Patient, take your time. Talk to some of the bigger places and don't buy in to anything until you understand what is going on. It's not the end of the world if you miss out on some time investing, as long as your money is in an FDIC insured account you're fine for right now until you have a better understanding.

I have had great experiences (in order of my preference) - Edward Jones and Fidelity.
posted by iamabot at 4:01 PM on October 7, 2008

Final note, you bank will also offer these services, if you like and trust your bank, give them a call as one of your options.
posted by iamabot at 4:04 PM on October 7, 2008

A money market account is only one [small] step above an FDIC-insured savings or checking account in terms of risk/reward profile. You'll get a slightly higher interest rate at the expense of not being FDIC-insured, but money market failures are extremely rare. This is a fine place to keep money for an emergency account (i.e. 6-12 months of living expenses). A money market account isn't really an "investment" as much as an alternate to a savings or checking account.

Beyond that, maxing out your contributions to a 401(k), especially if they are matched, is likely the next best place for your money.

Another reason I keep money outside of my checking account is in case of check fraud or identity theft - if someone cleans out one of my accounts, I still need to be able to pay the bills for a month or two while everything gets sorted out.
posted by 0xFCAF at 4:17 PM on October 7, 2008

Some money market accounts are in fact FDIC insured, just BTW, so they are as low-risk as any other deposit account at a bank. Interest-wise, you will generally do about the same a high-yield savings account such as that offered by FNBO Direct. A bank money market account will have limited check-writing and ATM privileges, which can be convenient compared to a savings account.
posted by kindall at 4:51 PM on October 7, 2008

Thanks for asking this question. I'm the exact same person, except for not having a roommate.
posted by deezil at 4:57 PM on October 7, 2008

My advice is yes, it is crazy to invest in a money market account right now... put the money in an S&P 500 or other similar, broad-based mutual fund. It is near impossible that you won't make money by doing this, especially if you are looking to keep that money for retirement.

Mutual funds spread the risk much more so than buying individual stocks. Broad-based ones like S&P 500 are not heavily managed, so they cost less to have (they are based on the Standard & Poor 500, so there's not much for someone to "manage").

Since your mother is an accountant, ask her to help you with the numbers: Average rate of return on S&P 500 (as an example), average rate of return on the money market account. And then, what is the market usually like, and what is it like now? Then ask her to help you identify the risk, as a young person with no real debt who could keep the money tucked away for decades. I suspect that even she will agree that you should take a bit more risk than a money market account right now.

"Buy low, sell high," as they say. Now is that "low" they are talking about.
posted by Houstonian at 5:53 PM on October 7, 2008

Before you make any investment you should understand what you're investing in. Money markets are intended to be like savings accounts with a higher rate of return. You put $1 in, you take $1 out. You leave $1 in for a year and you can take $1.05 out. There's not much to them in ordinary circumstances and there's no "good time to buy". Dollar in, dollar + interest out.

But this isn't ordinary circumstances, and your ability to take your dollar out isn't guaranteed. In fact, one fund has already "broken the dollar" and there's lots of reasons to be concerned there could be further problems. In general I advise people to jump into investing, learn about the risks and rewards involved and make some investments right away. And a money market is a great place to start. But we're in the middle of a financial hurricane right now and money markets (particularly money markets) are alarming. If I were you I'd wait a few months before taking your first step in investing. In the meantime put your savings in a nice, safe, FDIC insured savings account and build it up. Once the storm calms down a bit you can step out and do something more.

Congratulations on your saving money and thinking about investing. You're doing the right things. Just right now may not be the best time to take on risk.
posted by Nelson at 8:17 PM on October 7, 2008

Don't do MMs. They give you 2% or so returns.

A no-load GNMA mutual fund is the safest MM-type investment with relatively low risk.

Dollar cost averaging into the S&P500 right now wouldn't be a horrible strategy IMO, but see below.

You should be conservative with your 401K, maybe half MM and half index fund.

Assuming you make less than $90K or so, you should also be able to open up a Roth IRA and fully fund it with $5000 each year. The sooner you fund the Roth, the sooner you can pull money out for qualified expenses like first-time homebuyer (if you fund in 2008 you can withdraw up to $10,000 in 2013 or later).

Here's the "below":'

Don't try to find the bottom now. The market closed at 996 today and it could easily go to 800 by the end of next year, or this year for that matter.

Stay safe and in cash. There is a pretty good signal to move into the market, it's the 20/50 week crossover. Right now the 20 week moving average on the S&P is 1277 and the 50-week is 1356.

Using this signal would keep you out of the market until the 20-week average is 1% greater than the 50-week. Following this signal over the past 50-odd years would get you out of the market during the downtrends and in the market for most of the uptrends.

This is just the advice I'd tell my 20-something year-old self so take it for what it's worth.
posted by troy at 11:08 PM on October 7, 2008 [3 favorites]

Video on the 20/50 signal:

posted by troy at 11:11 PM on October 7, 2008 [1 favorite]

I'm wondering the exact same thing and the reason why a MM is attractive is that I can get to the money with no penalty if I need it.
posted by photoslob at 6:23 PM on October 8, 2008

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