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Investors Favor Money Markets Over Stock and Bond Funds: Morningstar
#1 Dumb Question - Than why is the stock market continuing to go higher and higher? What’s driving equity prices?
#2 Dumb Question - What’s the big appeal of money market funds, which on average have netted investors less than a 1.5% return YTD? (Compare that with a conservative actively managed 40/60 fund (TRRIX) which has returned more than 14%.)
#1 question - With low inflation and fixed income vehicles paying ~2%, many investors are chasing what is going up, US equities.
#2 question - Perhaps this is their cash position. However, money market funds are yielding 1.5%. I prefer Vanguard short term treasury index, VSBSX that yields 1.59% and the YTD as of 12/19/19 at 3.38%. If I venture out with intermediate term corporate bonds and some stock exposure with Vanguard Wellesley Income, VWINX (35/65 stock/bond), it yields 2.54% with YTD of 15.97%.
They're all nervous because John keeps predicting crashes and/or corrections. As for what's driving prices higher - no clue. MM's have zero appeal for me. I'd rather buy MMM or even GE then watch my money wasting away like that.
Bond funds, even short term ones, get some of their return from rate movements. That's why VSBSX has a YTD figure that's so much higher than its interest yield. With short term bond funds and MMFs paying about the same in interest, the question is: do you expect rates to go up or down?
Let's refine that a bit. What do you see as your downside risk (i.e. likelihood and magnitude of a rate increase) vs. your upside potential (chance and size of a rate decrease)? YMMV. My "hunch" is that rates are not likely to drop more than a quarter percent next year, and while not likely to rise more than that either, have more room to run in that direction.
In 2018, VUSXX returned 1.80% in 2018, all interest; VSBSX returned virtually the same amount (1.81%) in interest while losing 0.35% in value, for a net return of 1.46. That's what happens when rates rise. In 2018 2 year rate on treasuries started out at 1.92% and ended the year at 2.48%.
In 2019, 2 year treasuries started at 2.50% and to date (Dec 19) are sitting at 1.62%. Almost a mirror image of 2018. Though that larger 2019 decline to 1.62% (as opposed to the 2018 rise from 1.92%) suggests that rates have less room to fall now.
It's likely that over enough time you'll eek out a few basis points over the MMF with the short term bond fund. It may not be worth taking on volatility that in magnitude exceeds the small gain in net return.
Yields assuming no rate movement (i.e. SEC yields), according to Vanguard: VSBSX: 1.59% (as of Dec 18th) VUSXX: 1.58% (as of Dec 19th)
Uhhhh, okay; requesting clarification as to "who or what" does the term "investor" refer to in the linked article. If one reads the dollar amounts in the article and assumes these money amounts are for U.S. individual/retail investors (like members here); this assumption is then thrown out the window, as target date funds re-balancing is mentioned later in the write. SO, from where is the money measurement determined? I'd like to know the path.
The M* write from where this linked write arrived is not available for public view at this time. Thank you, Catch
... "who or what" does the term "investor" refer to in the linked article ...
*@Catch22 - I don’t know if this answers your question or not - but my read was that M* bases that conclusion on their tracking of U.S. mutual fund flows during 2019. They see a lot of $$ flowing into money market funds. I’d presume that’s largely individual / personnel investing as opposed to institutional. You raise a good point, however. Most major fund groups offer “institutional” class money market funds as well which conceivably may have distorted their conclusions.
A couple other points: Equities have soared in value, so there’s a lot of rebalancing going on. And that alone causes inflows into money market funds. The other point is that for wealthy or better off investors, the gains may be coming from individual equity holdings, while the profits from those individual holdings may still make their way into money market funds.
Don’t know what % of investors invest through hedge funds (likely a small %) - but there’s a very large pool of $$ sitting in those. The workings of hedge funds aren’t nearly as transparent as for mutual funds. I did check to determine whether ETFs were considered in M*s analysis of fund flows. It appears they do include ETFs in that total.
PS - Agree with @Mark that John’s almost daily postings predicting a market crash are probably scaring investors.
OK, finished some early chores and coffee gone. The numbers from the posted link seem large, but in the overall; may not mean much when related just to the IRA and 401K holdings (i didn't check 403b, but this amount is likely very large, too)
So, here's some info from ICI.org as of mid-year, 2019:
--- IRA total assets = $9.7 TRILLION
--- 401k total assets = $5.9 TRILLION
Secondary info reports total individual retirement market assets = $29.8 TRILLION, although I don't have time to chase this data breakdown.
Obviously, the numbers in the link are interesting; but not of significant value to cause me to change my ways as of today.
At least, some form of a value measuring benchmark info was available.
ADD: some of the flow to MM accounts likely can be attributed to required minimum distributions from traditional IRA accounts before Dec. 31
Comments
#2 Dumb Question - What’s the big appeal of money market funds, which on average have netted investors less than a 1.5% return YTD? (Compare that with a conservative actively managed 40/60 fund (TRRIX) which has returned more than 14%.)
Umm ... what am I missing here?
#1 question - With low inflation and fixed income vehicles paying ~2%, many investors are chasing what is going up, US equities.
#2 question - Perhaps this is their cash position. However, money market funds are yielding 1.5%. I prefer Vanguard short term treasury index, VSBSX that yields 1.59% and the YTD as of 12/19/19 at 3.38%. If I venture out with intermediate term corporate bonds and some stock exposure with Vanguard Wellesley Income, VWINX (35/65 stock/bond), it yields 2.54% with YTD of 15.97%.
Let's refine that a bit. What do you see as your downside risk (i.e. likelihood and magnitude of a rate increase) vs. your upside potential (chance and size of a rate decrease)? YMMV. My "hunch" is that rates are not likely to drop more than a quarter percent next year, and while not likely to rise more than that either, have more room to run in that direction.
In 2018, VUSXX returned 1.80% in 2018, all interest; VSBSX returned virtually the same amount (1.81%) in interest while losing 0.35% in value, for a net return of 1.46. That's what happens when rates rise. In 2018 2 year rate on treasuries started out at 1.92% and ended the year at 2.48%.
In 2019, 2 year treasuries started at 2.50% and to date (Dec 19) are sitting at 1.62%. Almost a mirror image of 2018. Though that larger 2019 decline to 1.62% (as opposed to the 2018 rise from 1.92%) suggests that rates have less room to fall now.
It's likely that over enough time you'll eek out a few basis points over the MMF with the short term bond fund. It may not be worth taking on volatility that in magnitude exceeds the small gain in net return.
Yields assuming no rate movement (i.e. SEC yields), according to Vanguard:
VSBSX: 1.59% (as of Dec 18th)
VUSXX: 1.58% (as of Dec 19th)
If one reads the dollar amounts in the article and assumes these money amounts are for U.S. individual/retail investors (like members here); this assumption is then thrown out the window, as target date funds re-balancing is mentioned later in the write.
SO, from where is the money measurement determined? I'd like to know the path.
The M* write from where this linked write arrived is not available for public view at this time.
Thank you,
Catch
A couple other points: Equities have soared in value, so there’s a lot of rebalancing going on. And that alone causes inflows into money market funds. The other point is that for wealthy or better off investors, the gains may be coming from individual equity holdings, while the profits from those individual holdings may still make their way into money market funds.
Don’t know what % of investors invest through hedge funds (likely a small %) - but there’s a very large pool of $$ sitting in those. The workings of hedge funds aren’t nearly as transparent as for mutual funds. I did check to determine whether ETFs were considered in M*s analysis of fund flows. It appears they do include ETFs in that total.
PS - Agree with @Mark that John’s almost daily postings predicting a market crash are probably scaring investors.
OK, finished some early chores and coffee gone.
The numbers from the posted link seem large, but in the overall; may not mean much when related just to the IRA and 401K holdings (i didn't check 403b, but this amount is likely very large, too)
So, here's some info from ICI.org as of mid-year, 2019:
--- IRA total assets = $9.7 TRILLION
--- 401k total assets = $5.9 TRILLION
Secondary info reports total individual retirement market assets = $29.8 TRILLION, although I don't have time to chase this data breakdown.
Obviously, the numbers in the link are interesting; but not of significant value to cause me to change my ways as of today.
At least, some form of a value measuring benchmark info was available.
ADD: some of the flow to MM accounts likely can be attributed to required minimum distributions from traditional IRA accounts before Dec. 31
Take care,
Catch