Having enough cash on hand to pay the bills is always a good idea. But in an economic crisis like this one, with millions unemployed and thousands of businesses in trouble, it's more desirable than ever.
Plenty of people don't have a stash of cash. But for those fortunate enough to have salted away some extra money, a pressing question is: Where should you keep it?
The standard answer is somewhere safe, like a bank or a money market fund. But don't expect much in return.
I'm not talking about a long-term investment; a diversified portfolio containing low-cost index funds that track broad markets would be my own preference for that. This is about a cash reserve for use over, say, the next three to six months, if life becomes cruel or you need to make a big payment for tuition or a car repair.
(What are low-cost index funds? They are a portfolio constructed to match or track the components of a financial market index. They’re cheap to run because they’re automated to follow the shifts in value in an index.)
Investors like to say 'cash is king'. In the coronavirus crisis, I'd say, cash is bigger than that; it's the emperor of all things.
"Investors like to say 'cash is king'," said Peter G. Crane, the president of Crane Data of Westborough, Massachusetts, which monitors money market funds. "In the coronavirus crisis, I'd say, cash is bigger than that; it's the emperor of all things. If you ever doubted whether you needed some emergency savings, you probably believe it now."
(What are money market funds? A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum.)
I spoke with Crane a decade ago, in the aftermath of the great financial crisis of 2007 to 2009, about the extraordinarily low yields on money market funds. Those rock-bottom, near-zero rates were expected to be temporary but they lasted for years. Now, he said: "We're right back where we were then. The economy is in trouble and money market funds are paying almost nothing."
What's more, many fund companies are already waiving fees. If they didn't, money market yields would be plunging below zero - in effect, into negative territory.
In that event, investors would be paying fund companies for the privilege of holding their money, an absurdity that major mutual funds generally want to avoid.
"That wouldn't be attractive to investors, to say the least," said Joseph K. Lynagh, who heads the cash management team at T. Rowe Price, a big asset management company based in Baltimore, USA. Using the T. Rowe US government money fund as an example, Lynagh walked me through the company's thinking.
The fund's current expenses, including administrative and management fees, add up to 0.42 per cent of total assets, a figure that you can find on the company's website. But when he said that Thursday, the fund's current gross yield - the income from its investments - was only 0.31 per cent.
"You can infer from that, that without the fee waiver, the fund yield would be negative 0.11 per cent," he said. In other words, you would give T. Rowe Price $1 (Dh3.68) and one year later, you would have a small fraction of a cent less. That's not terrible but it's not a winning proposition.
After all, money market funds are a competitive $5.2 (Dh19.14) trillion business. Deep-pocketed companies like T. Rowe Price, Vanguard, Fidelity, BlackRock and others are playing a long game.
And, he added, the gap between the T. Rowe fund's income and its expenses is likely to widen the longer this economic crisis continues. That's because money market fund managers must continually purchase new securities, and these will be paying lower rates than securities purchased before the downturn became acute.
But he expects that the company will swallow those deficits and won't let its money market yields fall below zero, just as it didn't during the long period of near-zero short-term rates from 2008 to 2015.
After all, money market funds are a competitive $5.2 (Dh19.14) trillion business, Crane said. Deep-pocketed companies like T. Rowe Price, Vanguard, Fidelity, BlackRock and others are playing a long game. "Even if they are technically entitled to charge investors - or recoup waived fees later - they generally don't want to do it," he said. "It would hurt their reputation too much."
That doesn't mean that they wouldn't do it.
In fact, as Daniel P. Wiener, an investment adviser and newsletter editor, told me, one outfit has put investors on notice that it intends to recoup waived fees down the road, as it did after the last financial crisis.
Crane says he would stay away from funds with the very highest yields. "Higher yield probably means higher risk," he said. At the moment, he said, a yield of just 0.50 per cent "is already in nosebleed territory."
For a safe place to keep your cash, he suggested that you consider government money market funds, which, as the name implies, hold government securities. They are "golden in a deep crisis", Crane said. "Prime funds," which can hold commercial securities, may be less liquid when the going gets rough.
But prime funds are a reasonable choice, too. They have been quite safe compared with mutual funds that hold stocks or bonds and often lose large amounts of money. Even in the worst case of the last 20 years, in which one fund lost money for investors, the losses amounted in the end to only 1 cent (37fils) on the dollar. "That's not a lot to worry about," Lynagh said.
Safety is the main issue, when you're looking for a place to keep your cash.
"Don't worry so much about the return on your money," Crane said. "Worry about the return of your money."
It's not easy to amass a cash fund these days. If you're lucky enough to have done it, be sure to read the fine print. That will help you avoid losses, including negative interest.
