Aug 21, 2023 - Economy

How I accidentally made one of the most popular trades of the year

Data: FactSet, Investment Company Institute; Chart: Axios Visuals

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.

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