The stock market has moved sharply higher in the first half of 2023, as investors begin to regain their conviction about its long-term prospects. Yet there's still plenty of uncertainty in the investing community, particularly given the macroeconomic challenges that continue to rear up in certain data releases from the U.S. government. Admittedly, fears of a recession have receded, but there are still worries about what the future could bring.
Ordinarily, you'd think that high net worth individuals would have the capacity to stick with stocks through good times and bad and still make out fine. Yet surprisingly, even the wealthy have chosen to take a substantial amount of their cash and put it into investments with no hope of growth -- but that currently offer solid and dependable yields.
The return of money market funds
Many rich investors are turning to money market funds right now. Indeed, money market fund asset levels have hit record levels recently. In early June, investors had $5.46 trillion parked in money market funds, up from $4.82 trillion less than four months earlier, according to data from the Investment Company Institute. Even with a big surge in the stock market, money market fund levels have stayed high, weighing in at $5.45 trillion in the last week of June.
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The bulk of that money is going into money market funds that specialize in government securities. Some of those funds concentrate on Treasury bills and repurchase agreements, while others also include other types of short-term debt issued by government agencies or corporations with strong credit ratings. Municipal debt offers unique advantages due to the tax-free nature of its payouts, but it makes up only about 2% of money market fund balances overall.
Why do the rich like money market funds right now?
It's not hard to understand why wealthy investors see benefits to holding money market funds in the current environment. The funds offer minimal risk and insulate assets from the ups and downs of the stock and bond markets. Even when interest rates rise, the impact on prices is negligible, and so fund shareholders can expect to reap the full benefit of getting more income due to higher rates.
Indeed, the surge in interest rates over the past year and a half has made money market mutual funds even more attractive. Until early 2022, money market fund yields had hovered around 0%, as the expenses of running the funds ate up all of the minimal amount of income that fund investments produced. However, as the Fed started raising interest rates, money market funds followed suit. By the end of 2022, rates were approaching 4%, and yields for typical money market funds in the past week were 4.83%.
To be clear, there are cash options that rich investors can access that pay more than 4.83%. One-month Treasury bills, for instance, pay close to 5.2%, while six-month bills have topped the 5.5% mark. However, the advantage that money market funds have over buying Treasury bills outright is that money market funds offer complete daily liquidity. You can deposit or withdraw from a money market fund at will, with many fund companies offering features like check writing.
A great investment -- in moderation
Investors need to understand that stocks are best for those with a long-term time horizon, as that provides the time you sometimes need to wait for a recovery after a bear market or other stock market downturn. For money you need sooner than that, cash investments like money market funds can be good options. Moreover, with rates at their highest levels in years, money market fund investors are finally getting paid to keep their cash parked on the sidelines of the stock market.
