I decided today that I wanted to fully protect my cash funds and as a result have decided to move them from my Vanguard prime money market account to my online ING Direct savings account. This is not a reflection on Vanguard, because it is the best fund manager in the industry, it is more a risk management move on my part due to all the financial market and institutional turmoil Why is moving to an online savings account better? Well, first money market accounts at Vanguard, Fidelity and other large cap institutions are for the most part not FDIC insured and in these bizarre financial times even the most well know institutions can collapse and leave depositors with pennies in the dollar. Secondly, and as importantly from an investments perspective the yields on money market accounts have dropped so low because of tightening credit that Vanguard’s money market fund (an industry leader) is now only paying a 2.25% APY (was 3.5% just a few months ago), whereas at ING Direct (see review) I can get 3% and even more at HSBC. So even taking out the FDIC insurance argument, as a straight investment decision on-line savings accounts are a better investment than most money market funds at the current time.
The following is the official website memo from Vanguard to its clients regarding money market accounts. It is the last few lines (highlighted) and the ongoing financial crisis that prompted me to make this move.
The recent bankruptcy filing by Lehman Brothers Holdings Inc. and widespread turbulence in the financial markets have prompted a number of questions about the impact on Vanguard funds, including money market funds. Vanguard is confident in the stability of its money market funds, all of which are managed with the objective of maintaining a stable net asset value of $1 a share. Vanguard continues to manage its money market funds very conservatively and with extreme prudence, focusing on high quality, short-term money market instruments. All of the investments in our money market funds are closely examined by our Fixed Income Group’s highly skilled and experienced credit analysts [Editor : I remember Lehman and Merrill having these highly skilled analysts as well!]. Analysts assess the quality of each underlying issuer through in-depth credit analysis and do not rely on agency credit ratings.
Our largest money market fund is Vanguard Prime Money Market Fund, [I am invested in this money market fund] which currently holds more than half of its assets in U.S. Treasury and federal agency securities [Editor: Yet is still has 14% in commercial paper which could be at risk if the credit crisis spreads further]. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. [Editor: This is the line that worried me the most] . Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investments are subject to risks. [Editor: I want to avoid as much risk as possible and FDIC insured accounts go a long way to that]
There is no need to panic and pull your funds out at this very minute. As the table on the left from a recent NY Times article shows, most of the larger and well known market funds are well capitalized and have not had significant redemption’s. However, I would urge you to look at your money market accounts and take some prudent risk management actions. If you have a significant amount of money in one of these non-FDIC insured money market funds consider moving some part to a FDIC protected on-line savings account (see recommendations) where your funds are insured (up to $100,000) and are currently getting a better return. If you are worried about your money market funds check your managers website communication or give them a call. As always, do your own research before making any decision.