How I accidentally made one of the most popular trades of the year
Through dumb luck — emphasis on dumb — I've gotten myself into the most popular trade of the year.
Why it matters: High short-term interest rates — and no sign the Fed will cut them anytime soon — are attracting massive amounts of capital to money market funds.
- The average annualized yield on money funds is now above 5%, according to Crane Data, an authority in the world of money markets.
What they're saying: "It's likely the highest yields since 1999," said Peter Crane, president and publisher of Crane Data, in an email exchange.
- Crane's data only goes back to 2006.
The latest: Money market fund assets just notched another record last week, the fifth straight week of new highs.
- There's now $5.5 trillion sitting in these accounts.
💭 Matt's thought bubble: A microscopic share of that money is mine.
The backstory: In light of the market rally, I recently checked my 401(k) accounts, hoping they'd recovered from 2022's market bloodbath. (The S&P lost 19%, its worst year since 2008.)
The intrigue: But my precious pittance hadn't increased nearly as much as I expected.
- Upon closer investigation, I saw why.
- It seems that at some point in Feb. 2021(!) I had taken a large slug of my retirement money out of stocks and stashed it in a money market fund.
- I have no memory of doing this — making it a humbling reminder of my own foibles as an investor.
State of play: This realization was an emotional roller coaster.
- First, I felt like a dope for missing most of the massive rally of 2021. (Stocks rose 26%! Idiot!)
- Then, I realized it also meant I sidestepped the brunt of 2022's market shellacking. (Genius!)
- The TL;DR was that I had basically missed out on a bit of market upside, maybe 10%. But nothing too horrible. (Phew!)
What's next: I then turned my attention to what I should do with the money — roughly $100,000 in one IRA — sitting in the money market fund.
- (I'm not wealthy. I've just been contributing to a 401(k) for over 20 years.)
- Should I put it into stocks? Bonds? Though I didn't want to miss any market gains, I wasn't looking forward to exposing that stockpile to market risk.
- Then I noticed something strange was happening in that money market fund ... The money was growing.
Context: Like millions of Americans, I've spent the better part of my investing life in the near-zero interest rate environment that existed between the financial crisis of 2008 and the COVID crisis of 2020.
- In that world, bank accounts, and similar places to put cash for safe-keeping — like money market accounts — didn't pay you anything.
- But now, I'm getting monthly dividend payments of roughly $425 on my $100,000. Not too shabby for zero risk. (At least for me.)
The bottom line: Judging from the multi-trillion-dollar inflow into money market mutual funds, I'm not the only one enjoying the refreshing return to low-risk investment yield.