Money market funds surge in market turmoil
Financial planners are on the front lines, and whenever the stock market burps they're the ones who have to deal with frazzled clients. Generally, proper allocation should limit the damage, but they have to get that across to investors.
"It's human nature to be nervous, but I tell
them that this will happen periodically and they just have to take a deep breath,"
says Benjamin Tobias of Tobias Financial Advisors in Plantation, Fla. "Since
the 1980s we've had so many periods of great volume and decline -- the 1987 crash,
the 2000 to 2002 decline. And both times long-term investors were rewarded for
holding on, and in relatively short order. Everybody knows stories of people who
panicked and are still hurting today as a result."
Tobias advises do-it-yourself investors to develop
an investment policy, write it down and stick to it.
"If you're going to shoot from the hip and
allow the CNBCs of the world to influence you, then when you hear the latest expert's
quickie advice, pull out the plan and see what you should be doing. Emotionalism
is the worst thing the investor has. The lack of emotionalism is the biggest thing
the adviser has over independent investors."
|Total money market fund assets
(billions of dollars)
In part, a well-allocated portfolio
means having enough cash to meet expenses and enough fixed income to weather a
prolonged market slump without having to sell stocks. If you feel very uncomfortable
during a period of market turmoil, it may indicate your portfolio needs some tweaking
to be more aligned with your tolerance for risk.
if you get panicky in downturns and sell equities, or if you just want to prudently
take some profits off the table, a high-yield money market fund can be a great
place to park the cash. If you have a brokerage account, be sure that proceeds
from a sale are swept into a high-yield fund. Many companies sweep the proceeds
into a low-yielding cash account; you have to manually request a trade into the
high-yield fund. Some brokerages use the high-yield fund as the default in retirement
accounts, but not in taxable accounts.
Many banks also have
money market and savings accounts that will pay you a decent interest rate
while you're deciding your next move.