Comments on: Breaking The Buck Is Not a Big Deal

By: Bruce

Bruce — Thu, 01 Jan 2009 05:06:14 +0000

The thing about breaking the buck is that you lost 3 % in one day. That is a huge annualized loss on what was supposed to be risk-free.

By: Jeff

Jeff — Sat, 27 Sep 2008 02:24:43 +0000

Although inflation is 6%, won't interest rates eventually pick up? I mean, since inflation is raising the costs of everything, eventually investors will want a real return. Or will the Fed keep their target interest rate low, thereby preventing the credit market to function normally. But, then again, the credit market isn't quite normal and hasn't been since the 1990's.

By: Chris

Chris — Thu, 25 Sep 2008 05:18:41 +0000

It is all about perception. People expect a money market to not have losses. People expect a 10% annual return on their 401k once they retire. This is a huge ponzi scheme. The demand for stocks will weaken. Losses will increase.

By: TFB

TFB — Wed, 24 Sep 2008 23:19:15 +0000

It's not even about the long run. If money market funds are yielding 2% while inflation runs at 6%, I guarantee you there won't be a headline about breaking the buck. People are OK with it. If the money funds broke the buck to -1% while inflation runs at 3%, all hell breaks loose. That doesn't make much sense but I understand why people feel differently one way versus the other. Money illusion is well documented.

Losing money is never pleasant, whether nominal or real. But losing money in a money market fund is still the least of my worries. If there is a time machine, I'd be SO HAPPY to trade my losses in other funds for some crappy money market funds that broke the buck.

By: simplesimon

simplesimon — Wed, 24 Sep 2008 21:29:17 +0000

I think this is a very interesting perspective about nominal vs real dollars. What you're arguing is that being in cash will lose to inflation. This is Investing 101. Anywhere you read will say to invest in the stock market for the long term to beat inflation and have enough money for a comfortable retirement.

But most people (I think) invest in money market funds for purposes like house down payment savings, car savings, emergency funds, or whatever else that will require liquidity and retention of principal. And like Paul said above, the psychological effect of seeing something believed to be unwavering through market conditions break the buck is, imo, pretty scary.

I kinda agree that it's not a big deal though, but I don't see it the way that you presented because I know cash loses to inflation in the long run. It's not the reason I have a cash account.

By: Dave

Dave — Wed, 24 Sep 2008 19:45:02 +0000

An additional point is that these losses are occurring in a year where inflation is running at 4-5%! So the real losses are in the 7-8% range. I would be upset with 7-8% losses in a balanced fund, let alone a money market account. So I agree that it is a big deal.

By: Paul

Paul — Wed, 24 Sep 2008 16:51:24 +0000

Technically you are correct. However two things occur to me. 1. I have never seen anyone apply the money illusion in a general audience investing article until now. People probably do generally understand this fact but investment returns are not stated in this context. Most general investors likely consider ALL personal investment returns as "gross" not including the illusion. (Maybe the individual's tax situation is the factor that tends to most influence this view.) There is personal consistency in the way the individual views his/her returns. The technical consistency of the illusion should exist too but is most often overlooked. 2. Money market funds have a reputation and CONFIDENCE level associated with the fact that the NAV will almost never vary from $1/share. People's expectations especially after years of a consistent NAV are that it takes a major crisis to cause a variation in money market NAVs. Now we are seeing a couple of funds have this issue. Confidence is shaken and it is a big deal. Certainly a few percent compared to current equity fund ytd losses is minimal. Yet it is substantial based upon the history of MMFs through ~30 years of good and bad ecomonic times.