Markets & Economy
Managing your cash with a money market fund
March 26, 2013
Amy Chain: Sarah, I'm going to come to you with a question. Maybe you can talk to us just a little bit about how investors should be thinking about using money market funds in their portfolio.
Sarah Hammer: Thanks, Amy. It's a great question. Here at Vanguard money market funds are a very important part of our full product lineup. David heads up our taxable money market funds, and Pam Tynan heads up our tax-exempt money market funds. We find that our clients use them for many different purposes, because they have the ability to buy and sell shares for $1 and, for that reason, a lot of clients will use them for many different purposes such as to put aside money for a down payment for a house, or if you're putting aside finances for a child's education and you know you have that tuition payment coming up, or even if you're just managing your daily living expenses. A lot of clients will use money market funds for all of those different purposes.
Amy Chain: This comes from Richard in Massachusetts. Richard, thanks for the question, "Depending on your net worth, is there any advice or rule of thumb that suggests what percentage of your investable assets one might keep in cash?" "With greed aside," Richard says, "one only needs so much money to be comfortable. Why invest it all?"
Sarah Hammer: That's a good question and on the minds of a lot of our clients right now, who are thinking about how to manage the cash that they have and may have adjusted their portfolios. We actually wrote a commentary on that last year as well. It's called Managing cash in your portfolio and our clients can find it on our website. In that paper we discuss how you should really think about cash separately from your long-term portfolio of stocks and bonds. What you need to do is kind of sit down and think about, first, your daily living expenses. How much do you need to live on a day-to-day basis? What are your expenses? When will they come due? And what are your assets that you have to allocate to that?
And then secondly, and separately, you need to think about an emergency fund. What kind of cash do you want to set aside if something happens and you're going to need to break open that piggy bank?
Once you've done that, then what we say is you should match the need with the investment. So, for your daily living expenses, you're going to want an investment vehicle that's very easily accessible. When we say accessible, we mean, you're going to want to be able to view it online maybe or you might want checkwriting capability. You're going to want to ask if there's an ATM card.
Then for your emergency fund, you're also going to want a principally protected product. You want a place where when you put your money in, you know that that principal is going to be protected in case you need to get to it.
There's a lot of different options on the menu for both of those two things. Money market funds being a great option because of that stable $1 net asset value. A lot of clients find them useful both for your daily living expenses and for your emergency fund. That's kind of how you're going to think about it. So, unfortunately, there's no rule of thumb but that's how you'll think about planning your cash in your portfolio.
All investments, including a portfolio's current and future holdings, are subject to risk.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
For more information about Vanguard funds, visit Funds, Stocks & ETFs or call 800-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
Vanguard experts discuss cash management
Despite historically low yields, money market funds still can serve a useful purpose in an investor's portfolio. David Glocke, a portfolio manager with Vanguard's Fixed Income Group, and Sarah Hammer, a senior analyst for Vanguard Investment Counseling & Research, describe the many ways shareholders use the security of a money market fund, from meeting living expenses to saving for college tuition or a rainy day.
Other excerpt from this webcast:
- All investments, including a portfolio's current and future holdings, are subject to risk.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- For more information about Vanguard funds, visit Funds, Stocks & ETFs or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.