Investor Facts: What Is A Money Market Fund?

money market fund

A money market fund is a type of low-risk mutual fund investment that holds mostly short-term public and private debt.

Mutual funds aim to grow the cash placed them by investors, usually by owning stocks and bonds. A money market fund, in contrast, is designed to maintain the value of the investment. While not risk-free, these funds are highly liquid and typically pay a higher return than a standard bank savings account.

Investors often use a money market fund to park cash they intend to reinvest in a short period of time, such as incoming dividend and interest payments and their own contributions.

money market fund

Money market funds own short-term debt issued by highly rated governments and corporations. Those institutions in turn have come to rely on the money markets for access to cash for immediate purposes, rather than taking cash from their own operations.

A money market fund seeks to keep its net asset value (NAV) at $1, meaning every dollar invested by an individual can be redeemed for $1 at any time.

If you have a brokerage account, you probably have a money market fund as part of your account. The investment company typically is not a bank, although some approximate bank services. As result, cash coming into your account from you or from an investment you own has no place to be held in the short run.

You likely expect your contributions or incoming cash to be reinvested in short order. If you set your investments to reinvest automatically they will, so cash is not an issue. However, some investors consider holding cash an important part of their portfolio design, or they choose to invest only periodically or to reinvest into different assets.

In that case, the cash is placed in a money market fund. The fund maintains the value of your money and pays a return that is usually more favorable than you would otherwise expect from putting cash in a bank. Plus it’s available to reinvest at any time.

A “prime” money market fund owns highly rated public and private debt. There are tax-exempt money market funds that invest in municipal bonds, and some money market funds only buy U.S. Treasury debt.

Low risk vs. no risk

Money market funds are low risk but not risk-free. Over the decades of their use, only a few have “broken the buck” and reported a net asset value of under $1. Generally, those failures were resolved successfully by the funds themselves or, in the case of 2008, with the financial backing of the U.S. government.

A long-term retirement investor typically will not be faced with risk in any case. Dollar cost averaging, the practice of steadily investing contributions and incoming interest and dividends, usually means your brokerage account will show no or very little cash on hand.

As you take money out of a retirement account as income, the cash also spends very little time in a money market fund. Often, the brokerage will issue you a check in short order, so the money market exists essentially to hold the money overnight while the firm prints and mails out the requested distribution.

3 Savings Habits Can Change Your Life

savings habits

Why do some people seem so capable of saving for the long-term, while others struggle? Is it in your DNA, your upbringing, or something else?

Your demeanor is a big part of who you are, but it’s mostly a matter of how you do things. Savings habits are not born into you. Rather, you adopt them from your parents, your friends and others in your life.

savings habits

It sounds difficult, but change is possible. Creating a new, more forward-looking you is a matter of changing how you handle the money in your life. That means learning new ways to divert income out of your pocket, where it’s likely to be spent without much thought.

Savings habits are not a perfect answer, but having them is definitely a powerful way to build a long-term retirement plan and, in time, to create wealth rather than want in your life.

Here are three savings habits you should adopt immediately:

Pay yourself first

It’s a no-brainer, but far too few people think this way about money. When you get a paycheck, take out  a set percentage and send it to your retirement plan.

If you have a job with a 401(k) or 403(b), this can be remarkably easy to do. Go to your human resources office and enroll. Now pick a percentage of your gross pay that will make a difference down the road.

Experts suggest 15%. If you can’t manage that, make it less and ask your HR director if your company will divert a portion of your raises in the future to retirement. Many plans do.

If you are self-employed and use an IRA, this is harder but crucial. Every check in the door, take out that percentage target and mail it off to your plan. You won’t miss the money once it becomes a habit.

Bucket your spending

Too often, we dump our net pay into a single account attached to a debit card and just spend it down. Pretty soon we’re running out of money before running out of month.

Instead, consider creating two or three accounts. Call one spending money and another bills. A third one might be called vacation fund or rainy day money.

Your employer can split your check into more than one account, usually. The more you automate this, the better. Make sure you send enough to the bills account to cover your actual bills each month, plus a little cushion.

Then divert some fixed amount to your rainy day fund. Whatever is left is yours to spend.

Automate investing

The fundamental error people make with long-term money, believe it or not, is that they fail to invest it. Sure, they save money, but they put it into very low-interest savings accounts or even keep it as cash at home.

Having cash is useful for emergencies, but most of your savings should be invested in a portfolio of stocks, bonds and other assets that will grow your money over the years.

If you don’t invest, you lose out on the compounding power of reinvested dividends and interest. Over time, inflation will reduce the purchasing power of your cash. Only investing can safeguard you from that.

An easy way to automate your investment process is to build a solid portfolio of diversified index funds and rebalance it periodically. Any new cash you put in can be rebalanced into the different asset classes as well.

Savings habits are not easy to form, but once you create a set of repeatable money moves, the effect is undeniable. You become one of those people good at money, at last.

Investor Fact: What Is A Bond?


A bond is an interest-paying loan made to a company, government or nonprofit organization by an investor or investors.

Most large concerns, public or private, occasionally need capital. They can raise money by issuing stock or by borrowing from a bank, but they might choose to issue a bond instead.

City, county and state governments, the federal government and certain nonprofit groups such as colleges and hospitals can raise money by selling bonds. In all cases, a bond is nothing more than a loan that must be repaid to investors over a period of months or years, plus interest.


Investors buy them in order to assure themselves of a specific fixed rate of return on their money. Since bonds are rated by independent third parties, it can be easier to assess the risk of bond investments compared to, say, stocks.

Nevertheless, several factors affect the long-term value of a bond, such as a change in overall interest rates and the management quality of the issuing company or government body. While not risk-free investments, some offer markedly lower risk than others.

A useful way to think about a bond investment is to compare it to stocks in an apples-to-apples way. When an investor buys a stock, the idea is to participate in the future earnings of the firm.

That’s the plan, but the reality is that investors tend to think of a stock investment in terms of its annualized rate of return. How much will money will I get back in dividend income from the stock, if any, and how much will the price change to the positive each year?

That combination of income and appreciation is total return. While difficult to predict, that number does offer investors a sense of whether holding any given stock for a long period is worthwhile.

Bond investors do the same calculation, just in a different way. When they buy one directly from the issuer, they know what to expect as income in the form of annualized interest. That’s the coupon.

For instance, a $1,000 bond that has coupon rate of 4% will pay out $40 per year in income (1,000*0.04=40). A company might reduce or cease paying a dividend. A loan, however, must be repaid by definition. That’s why it’s a far more secure an investment, if income is your goal.

That’s the income, just like a stock dividend, but what about appreciation? Here’s where things get tricky.

Market logic

Bonds issued directly and held by an investor pay interest income until it matures, or reaches its expiration date. That might be in a three months or 30 years.

Yet you also can buy from another private investor in the bond market. The selling price, however, will be affected by the prevailing direction of interest rates.

For instance, imagine you are offered a bond on the secondary market that pays 3% and has five years until it matures. A second company is offering a new, directly issued bond that pays 4% and also matures in five years.

Assuming the companies are similar in terms of risk, the 3% bond cannot compete. So the seller has to lower the asking price in order to compensate you for the difference in income.

That’s why a rising interest rate drives down bond prices and, conversely, a falling interest rate drives them up.

Keep that inverse relationship in mind and much of what you read about bond investing will begin to make sense: Since coupons are fixed, bond face values must change to make two bonds comparable.

Save More By Killing One Big Debt

save more

Everyone knows the feeling: Rushing toward the end of the month and hoping the bills get paid.

Unless you’re financially independent, it’s a normal pattern even at high income levels. Most Americans aren’t sure how they would pay for a major health crisis or home repair, and being a high income earner isn’t any better.

That’s because we tend to spend more as we make more. New job, bigger house. Get a raise, lease a new car.

save more

Meanwhile, all of the normal cost-of-living stuff — food, electricity, clothing — quietly rises in price due to inflation. We’ve enjoyed very low inflation for some time, but there’s no guarantee that will continue.

You know you need to save more, but how? Start by listing every one of your monthly bills, including outstanding debts.

That includes automotive payments, house payments, credit cards, utilities, educational costs (such as school tuition) and everyday spending on food and entertainment.

Now add in your estimated taxes for the year, on your income, your property and investments.

Numbers in hand, there are a few ways to start to save more for your retirement, but let’s start on what cannot be avoided.

You will pay income taxes. The best way to lower that bill is to lower your taxable income by saving more into a tax-deferred retirement plan, such as an IRA or 401(k).

You can’t really avoid eating. Not going out to the movies or spending on entertainment is something you can cut back on, but it’s usually not sustainable.

That leaves revolving debt, such as credit cards, and things like home and car payments.

Let’s assume for the moment you decide to focus on credit cards first. Good plan. Cut back on eating out and entertainment for a while and get your credit card debt out of the way as fast as you can. High interest debt is a killer.

Right-size and save more

If that works out, go ahead and restore your food and fun budget but reconsider how to kill one big debt in your budget and convert that money into savings.

If you have a car payment, how big is it? Is it two payments? Is it a lease? The typical luxury car lease is easily $500 a month, not counting insurance, repairs and gas.

Consider downsizing one car at a time, and banking the difference into your retirement account. If you have only one car, ditch the lease and buy a used car for cash. Aim to be debt-free on your vehicle.

Now look at your home. Chances are, you don’t want to move. But if a move happens because of a relocation or downsizing, make sure to “right size” your real estate commitment and bank the difference.

You can put yourself on track to save more and a better retirement, just by making a few key decisions and then sticking to a plan.

Investor Facts: What Is Yield?


Yield is what you earn from an investment in the form of regular, periodic income.

Investments produce cash for the investor two ways: growth and income. Growth is a rise in the price of the investment that results in an opportunity to sell it at a profit.

Income is payment to the investor for holding the investment and not selling it. This takes the form mainly of stock dividends or bond interest.

Yield is nothing more than a calculation of that income based on the total investment, typically over one year. Since your cash is tied up, it’s worth knowing what percentage of your money is being returned to you over 12 months. That number allows you to accurately compare different investments.

For instance, a stock purchased at $100 pays an annual dividend of $2. Thus you receive a dividend yield of 2% (2/100=0.02). Likewise, a bond that pays a 3% coupon means your investment of $100 will pay out $3 per year in interest.

Yield is an important factor when choosing an investment, but just as important is risk: How much risk are you taking to get that specific yield on an investment?


Stocks and bonds represent very different kinds of risk, and those risks will fluctuate over time and vary according to which stocks and bonds you choose.

The dividend on an established utility or telecom stock, for instance, is likely to represent less overall risk than a higher dividend from a tiny biotech or oil-drilling firm. A smaller, speculative firm might cut its dividend or go out of business entirely.

Taking a step back, the yield on any stock is fundamentally a higher risk than on a typical government bond. That’s because stocks represent companies that can go bankrupt, while bond-issuing governments rely on taxpayers and almost never fail to pay back their investors.

“Almost never” is an important caveat. There have been cases of municipal bonds, state bonds and even country bonds going sour. But these are rare compared to corporate shares losing value, which happens regularly to stocks.

Knowing how yield works can benefit your portfolio a number of ways. For one, the dividend payment on a stock is just part of what investors call total return.

First calculate the annual income yield on a stock in dollars. Then add the change in price over 12 months. Those two number together are total return, the actual gain you have experienced by owning the stock.

Risk and return

Many long-term investors choose to automatically reinvest their dividends into a stock, meaning they use that income to increase their ownership of the stock every quarter.

Likewise, investors seeking a better dividend yield sometimes see falling share values as a chance to buy more at a lower price. That increases your income and thus increases your total return from the stock.

For instance, the company with the $2 dividend you happily bought at $100 now trades at $50. The dividend payment has not changed. Your yield on that investment is no longer 2%. Rather, any new dollars you invest will pay 4% (2/50=0.04).

The topic of risk and return is a complicated one, but it can be made easier by investing primarily in index fund products which, besides being cheaper, produce a diversified return that includes growth and income.

You Won’t Retire On A Hot Stock Tip

hot stock tip

Got a hot stock tip? First, spend some time on the financial news sites and try to get a sense of what’s going on in the stock market.

Things are a disaster. You should sell. No, things are going great, and you should buy.

There’s a change coming in the next few weeks that will crush the economy. Unless the change doesn’t come, or something different happens, or it doesn’t matter.

hot stock tip

If you watch old movies about stock traders, you always see the same thing. A roomful of men in suits screaming out prices.

That was how trading actually happened for many years. It still happened that way until recently in some commodities markets.

Now it’s silent on the trading floors because all the screaming is virtual. Electronic trades buzz down wires at each other, in a head-on crash with reality. Their bets will be right or wrong. Their trades will be good or bad.

Some investors are leveraged to the hilt. Others are totally passive and simply in a holding pattern. Some are short-selling but forced to buy when prices go up.

Now multiply all that activity by trillions of dollars in various currencies, all moving at the literal speed of light thanks to fiber optics.

It’s not a room full of screaming men. It’s a planet-wide battle of electrons and ideas and fast money, moving in real time and reacting to news, rumor, guesswork and sometimes sheer math.

Twenty years ago, a retail investor might have gotten a hot stock tip. And he or she might have traded on that information and, quite possibly, made money.

But those days are long gone. Acting on a hot stock tip is high risk to say the least. Nobody really has “inside” information anymore, thanks to strict federal regulations.

If they do, the info is probably illegal or just plain wrong. You could lose money as easily as make it, and there would be no way to know the difference.

A hot stock tip that matters

If your plan is to retire on your investments, the way to get there is by owning growth investments. That means stocks.

To avoid the risk of picking wrong, it’s easier to own a lot of stocks and ultimately easier to own all of them through an index fund. After that, you might consider a portfolio approach to smooth out the ups and downs that are common with stock investing.

The less you do, the more likely you are to come out ahead. Highly skilled, professional money managers struggle to keep up with the overall stock market once you subtract their fees.

Retirement investing should not be a struggle. In fact, it’s easy to do and requires very little attention, if you set it up right.

The rest is of what you hear about investing is mostly noise and best ignored.

Investor Facts: What Is A Roth IRA?

roth IRA

A Roth IRA is a type of individual retirement arrangement (IRA) that allows tax-free withdrawals on income and growth.

Most people are familiar with employer-based 401(k) retirement plans and their individual plan cousin, the IRA.

A second type of IRA, known as a Roth IRA, works the same way as a normal IRA with one major difference: Money you put in today is not free of income tax, yet withdrawals later on are free of both income and investment taxes.

roth IRA

For instance, if you put $5,000 into a 401(k) or a traditional IRA this year, you would in most circumstances be able to reduce your taxable income by that amount. That reduces your total income tax bill at both the federal and state level for the year.

You will be taxed on that money later on, when you withdraw the money in retirement, but only at your income tax rate in the year you take out money.

A Roth IRA, in comparison, offers you no reduction in taxable income this year. The money you contribute is taxed now.

However, once contributed it can grow and compound for decades. When you take Roth IRA money out to spend, there is no tax on that income, no tax on the reinvested dividends and no tax on the growth of your investments.

A Roth IRA is best thought of as a tax tool. There’s nothing special or different about the underlying investments in a Roth IRA. Since it’s an IRA, you can put your money into stocks, bonds, mutual funds, index funds — any investment available to IRA investors.

The power of compounding and prudent investment management in a typical retirement can turn relatively modest contributions over years into a significant source of retirement income. However, once you reach the point of needing to take money out of your retirement accounts, that money will be taxed as income.

Your 401(k) plan income will be taxed, as will any traditional IRA income. In many states, Social Security is taxed too, and you will pay federal tax on Social Security payments, of course.

For many retirees, all this can seem like a non-issue. After all, you can take Social Security first, then rely on retirement plan withdrawals to tide you over for the difference.

Ah, but then the RMDs kick in. Required minimum distributions (RMDs) are the government’s way of ensuring that it collects tax at some point during your lifetime. You got the advantage of tax-free growth for years; now Uncle Sam wants his piece, too.

Roth IRA estate planning

RMDs start at age 70-and-a-half and affect both 401(k)s and IRAs. In the case of 401(k), they can start at your retirement date, which might be earlier. Then, according to IRS actuarial tables, the minimum amount you must take out (and pay income tax on) goes up steadily.

A Roth IRA allows you to better control your total tax bill. For instance, you might choose to delay Social Security income (and the taxes on that) until your maximum retirement age, a number which adjusts depending what year you were born but is between 65 and 67 under current law. You also get more if you wait, too.

You might choose to put off taking money out of an IRA or 401(k), too, or keep working and contributing. Another route would be to take a portion of your tax-free Roth IRA money each year in order to avoid a higher tax bracket.

Finally, some folks use Roth IRA money as a kind of estate planning tool, taking out taxable income to live on and leaving tax-free Roth IRA accounts behind for children and grandchildren. Because of the withdrawal rules around inherited IRAs, they can take out less over their longer lifetimes and let compounding turn small dollars into large balances by their retirements.

How Much Money Stocks Can Make You

much money can stocks make

Everyone wants to make a killing in stocks, but nobody wants to take any risk. That’s the basic conflict at the heart of any investment process.

How much money stocks can make you in the real world is a known fact. If you consider one big firm’s forecast, however, the answer might shock you. Natixis, a global asset manager, believes that while investors expect 8.5% annually from stocks, their advisors believe 5.9% is more likely.

This pattern repeats around the world, to varying degrees. Most investors think they’ll make close to 10%, while their advisors see a number close to half that.

The difference is important. A $10,000 investment that earns 8.5% in three decades turns into $115,583. If the advisors are right, the number you get is just $55,831 — nearly 52% less money!

much money can stocks make

The usual investor response to a lower return is to increase risk. No pain, no gain, right? Frustrated investors tell themselves that it’s all about being patient. But a string of low-return years can lead to trouble.

First it’s market timing — trying to get in or out of the market based on earnings, headlines or a hunch. Then stock picking, trying to isolate the winners from the losers among thousands of choices.

Too often, stock picking just ups the pressure. Concentrating your money into a small number of stocks leads to obsessive market following and ever more distracting information. Emotions take over.

It’s for that reason that the “average investor” earned just 2.1% over the 20 years from 1996 to 2015, according to J.P. Morgan. Comparatively, the stock market index by itself returned 8.2%.

You might conclude from reading the above that investors aren’t wrong to expect 8% or more from their portfolios, given what the S&P 500 has done in the last 20 years.

Yet most people don’t invest in the S&P 500. Often they fear the volatility that comes from being 100% in stocks and instead own a mix of stocks and bonds.

How much money can stocks make?

Yet even a 60/40 mix of stocks and bonds returned 7.2% over the same period. Where do advisors come up with a number below 6%?

One explanation is that advisors think that stocks and bonds will return less in future years than they have in the past. They don’t know this, but it’s a currently popular sentiment among professional investment managers.

Another less charitable explanation is that the difference between 5.9% and 8.5% is mostly explained by advisors’ fees. Since many advisors charge their clients 2% or more for their advice and the work of underlying fund managers, it’s not surprising math.

How much money stocks can make is undisputed. How much money you leave in the hands of managers is the question mark. A portfolio of low-cost index funds, well managed by software, removes that question mark and creates a much clearer picture of how your money will grow.


Investor Facts: What Is Diversification?


Diversification is the practice of owning a wide variety of investment types in order to reduce risk.

Investors sometimes find the idea of diversification daunting, but it’s nothing more than not putting all of your eggs into one basket.

For instance, owning 1,000 stocks through an index fund provides more diversification than owning 100 stocks in an active mutual fund and far more than owning 10 stocks directly. If those investments are different from each other, that increases the level of diversification.


Furthering the stock example, diversification means owning both large-cap stocks and small-cap stocks and both foreign and U.S. stocks. Larger portfolios might drill down into mid-caps, emerging market stocks, dividend stocks and so on.

From there, diversification might continue into owning additional investment asset classes, such as bonds, real estate, commodities and cash.

Investors come and go from the different asset classes depending upon their collective perception of the economy, politics, corporate earnings and other factors. Nevertheless, they rarely abandon an asset class and, often, market prices revert to the long-term average, or mean, for that asset class.

Diversification thus can provide much of the returns of each asset class while not amplifying the risk that comes from putting all of your money into any one investment type.

Diversification is a proven portfolio strategy that far too many people ignore at their own risk.

Often, investors load up on a single stock because they see it touted on television or on the Internet. Others build up a retirement plan by taking company stock from their employer and never selling. Pretty soon, it’s most or all of their money in one stock.

Loyalty to a company is fine, but the price of that loyalty to your retirement can be high. Just ask anyone who held Enron or General Motors stock when those companies went under!

Good practice

Sad as those stories are, you can diversify automatically by using a large-cap mutual fund to own stocks instead of picking them yourself. Most mutual funds own dozens or hundreds of positions as a matter of investment policy.

An index fund, meanwhile, is by definition diversified since it holds all of the stocks in an index, such as the 500 stocks in the S&P 500, or the thousands of stocks in a world stock or total market fund.

From there, it’s good practice to add diversification across multiple asset classes, such as bonds, real estate and commodities. You will find instant diversification by owning index fund products that track the benchmarks for each distinct asset grouping.

Over time, normal market movements will cause your portfolio to become overweighted in some of these initial asset  class choices. Rebalancing — selling investments that have gone higher and buying more of those that have moved lower — is a simple way to return to your target portfolio.

The Upside To Investing When News Is Bad

investing when news is bad

It’s fairly easy to look around the world and recognize places where uncertainty reigns. Not wars or disasters, but political uncertainty, the kind that depresses investors.

Run away? Not really. Investing when news is bad can be a great strategy. Take Brazil, for instance. Its main stock market index is up 66% so far this year.

That’s much better than the S&P 500, up just a bit more than 8% so far this year.

Despite the largely positive glow of the Rio Summer Olympics, Brazil has real problems. They just ousted an elected president, albeit peacefully. Huge numbers of ordinary Brazilians feel they’ve been left behind as the country’s elite have prospered.

Brazil is a big oil driller, and the price of oil has tanked globally. The list goes on.

investing when news is bad

Yet here we are, watching their stocks zoom higher. So why doesn’t everyone just buy Brazilian stocks and let it go? Because the performance this year follows a whopping 41% decline last year.

How many long-term investors could take that kind of emotional ride year after year? Not many. Even if you diversify and buy a Brazilian stock index fund, there’s no guarantee that next year won’t be another cliff dive into oblivion.

Investing in stocks means you have to be able to handle the swings that can occur. Most American investors remember perfectly well the dread they felt in 2008 when the U.S. stock market crumbled to bits.

We’re back and setting new highs, but the climb out of that hole has been long and stressful.

The dilemma of investing remains the same, whether you’re talking foreign or domestic stocks. Most of the growth in your portfolio is going to come from stocks. The long-term data proves it.

Yet most of the volatility in your investments is going to come from stocks, too. When stock prices move up sharply, we rejoice. But then we brace for the downdraft that can follow.

Where investors get into trouble is market timing, attempting investing when news is bad and then getting out when news is good.

Zigging when they zag sounds great, the ultimate money-making strategy. And it can work from time to time. More often than not, though, investors pay a big price for trying.

Softening the blows

What’s the solution? Portfolio investing instead. Yes, buy Brazil, and Russia and China, too, but remember that the volatility of those places will be a challenge. Accept only as much of that risk as you can stand.

By maintaining a diversified portfolio, you can soften the emotional blows. But there’s another advantage, too.

Sticking to your portfolio will help you do more investing when news is bad. Rebalancing allows you to load up on stocks as they fall in price and sell off those gains when recoveries occur.

Nobody can predict what will happen next, nor should they even try. The cost of being wrong is far too high. Yet you can participate in those good times just by following a simple, well-conceived plan.

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