 Personal Finance PowerPoint Presentation, Money Market versus Short Term Bonds. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Money Market versus Short Term Bonds. What's the difference? Which you can find online. Take a look at the references, resources, continue your research from there. This by Jennifer Wills, updated August 31, 2020. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping them in mind. We're now looking at money market versus short term bonds. On a short term basis, money market funds and short term bonds are both excellent savings vehicles. Both are liquid, easily accessible and relatively safe securities. So as individual investors, we're often looking at that kind of diversified portfolio, which means we might have some of our money in say the stocks or equities which have more volatility, but the possibility for more gains typically, and then some of our money might be on more of the fixed income side of things, which could include like bonds, savings accounts, CDs, money markets and so on. And then we also want to be thinking about the liquidity or how easily we can access the money, because we would like to be getting a return on it. But we'd like to have some of our cash flow in such a way that if there was an emergency or whatever our current cash flow needs will be in the future, that we can access the flow necessary to deal with those needs. So however, these investments can involve fees, may lose value and might decrease a person's purchasing power. So decreasing the purchasing power possibly due to say inflation, right, because when you're putting money into the short term type of vehicles, that you can access more readily than you might not be getting as high a return, and therefore inflation can eat into the actual purchasing power of those savings, not going down as much as say if there was a decline or a fall in the stock market, for example, but still losing purchasing power. So although money market funds and short term bonds have many similarities, they also differ in several ways. You might be looking at that category and saying, okay, which would be the best for that particular part of my investment strategy. Money market. So the money market is a part of the fixed income market that specializes in short term debt securities that mature in less than one year. Most money market investments often mature in three months or less. So you got that short term kind of rollover when they're going to be maturing because of their quick maturity dates. These are considered cash investments. So you in essence, if you categorize stocks, bonds, cash, for example, because you can access these fairly short term, you got fairly liquid investments, fairly cash related investments. Money market securities are issued by governments, financial institutions and large corporations as promises to repay debts. So they are considered extremely safe and conservative, especially during volatile times. So when you're thinking about the overall stock market and you see basically people moving from say equities stocks to something like bonds and money markets and things like that. That's usually a sign that people are getting sketchy about the stocks. They're thinking that stocks, maybe the market is going to go down. If the market were to go down, then obviously you could lose money on the stock market. Whereas if you put your money in these other kind of investments, you're not gaining a lot in terms of interest, but you're not likely to lose the principle would be the idea. We may not be using these indexes as readily to kind of move with the market so much as individual investors if we're trying to gear towards the long term plan. In other words, you don't want to panic and try to outplay the market if it's going against basically your long term strategy, but that's a general idea of what might happen. So access to the money market is typically obtained through money market mutual funds or a money market bank account. So these are going to be the tools that you might use to get access to the money markets, the mutual fund being a common kind of investment tool or strategy. The assets of thousands of investors are pooled pooled by money market securities on the investor's behalf, allowing us to get access to the benefits of the pooled investments through the use of the mutual funds. As we've seen in prior presentations, typically people thinking of mutual funds as they relate to stocks, but you can have that same kind of pooling component that can help you out as well with other tools, other investments. So shares can be bought or sold as desired, often through a check writing privileges. A minimum balance is typically required and a limited number of monthly transactions are allowed. The net asset value, the NAV typically stays around $1 per share, so only the yield fluctuates. Because of the liquidity of the money market, lower returns are realized when compared to other investments. Purchasing power is limited, especially when inflation increases. If an account drops below the minimum balance required or the number of monthly transactions is exceeded, a penalty may be assessed. So with such limited returns, fees can take away much of the profits. So the fees related to the money market funds could remove a lot of the profits given the fact that you've got these short-term investments and you would think that you're not going to have a big return on them, which is part of the tradeoff that you would have for investing in fairly liquid investments that you can have access to fairly readily. So unless an account is open at a bank or credit union, shares are not guaranteed by the Federal Deposit Insurance Corporation, the FDIC, or the National Union Administration, the NCUA or any other agency. So when you think about having money in the checking account or possibly savings account at like a bank or a financial institution, then they are actually not holding on to all that money. They're holding on to a reserve and investing a lot of it. In the past, in like the 30s, if there was loss or a decrease in security on the banks or people's confidence in them, they might ask for their money back all at the same time. The bank wouldn't have it and therefore you'd have bank runs. And to stop that, you have this kind of insurance concept that's supposed to increase and does typically increase the security or safe feeling of people investing so we don't have those bank runs. We don't have that same kind of tool available for some other types of investments. So short term bonds, bonds have much in common with money market securities. A bond is issued by a government or corporation as a promise to pay back money borrowed to finance specific projects and activities. So bonds are basically like a loan from us the investor to the issuer of the bond, possibly government bonds or possibly a corporation. We expect to get the principal back in essence that we that we're kind of like loaning plus the interest in essence for the use of the money. So that's kind of like rent on the purchasing power of the money. In such cases, more money is needed than the average bank can provide, which is why organizations turn to the public for assistance. So buying a bond means giving the issuer a loan for a set duration. The issuer pays a predetermined interest rate asset intervals until the bond matures. So we're going to basically fix the return that we're going to be getting. We might get it like semi-annually or something like that. At maturity, the issuer pays the bonds face value. Basically if they sold it not at a premium or a discount, that might be the purchase price. A higher interest rate generally means a higher risk of complete repayment with interest, meaning if you buy a government bond, they're probably going to have a lesser of an interest rate because you have less risk with regards to the default of the bond. Corporations are going to have more risk with the default of the bond. If therefore you would demand a higher interest rate to loan money to them, once you can always loan money to the government. And then smaller companies, of course, you'll demand a higher rate of return from them, or the market will because there's more default risk related to them. So most bonds can be bought through a full service or discount brokerage. Government agencies sell government bonds online and deposit payments electronically. Some financial institutions also transact government securities with their clients. Short-term bonds can be relatively low risk predictable income. Stronger returns can be realized when compared to money markets. Some bonds even come tax-free. So you could, we've talked about different kinds of bonds like municipal bonds. For example, a short-term bond offers a higher potential yield than money market funds. So you might have the capacity, money market funds are going to give you typically more interest than you might get at say just putting it in the checking account or possibly even savings account, but you might get a higher return with the short-term bonds. So bonds with quicker maturity rates are also typically less sensitive to increasing or decreasing interest rates than other securities. Buying and holding a bond until it is due means receiving the principal and interest according to the stated rate. Bonds carry more risk than money market funds. A bonds lender may not be able to make interest or principal payments on time or the bond may be paid off early with the remaining interest payments lost, depending on the kind of bond that you are having. And we've talked about different kinds of bonds in the past. Now again, the likelihood that they default on the bond and they don't pay it is going to be dependent upon who issued the bond. If it's a government bond, you would think that likelihood would be quite small. So if interest rates go down, the bond may be called paid off or reissued at a lower rate resulting in lost income for the bond owner. If interest rates go up, the bond owner could lose money and the sense of opportunity caused by having the money tied up in the bond rather than reinvested elsewhere. So if you're holding on to the bond and you've locked in a certain amount of time that you're going to be getting a fixed return, you've got the interest rate risk or the rate risk which we would say that if the interest rates go up as you have your locked in rate, it's kind of the reverse of a mortgage situation because now you're the investor at this point in time. You're the loner of the money at this point in time. So if market rates go up and you have the money, you could invest at that point in time and get a larger return than what you have currently locked in on the bond. So special considerations, there are pros and cons to investing in money market funds and short-term bonds. Money market accounts are excellent for emergency funds since account values typically remain stable or slightly increase in value. So clearly if you're using it for something that you want to be able to have access to readily but hopefully get a bigger return on it, then you might have on say just your checking account clearly or a savings account that could be a way to go. Furthermore, money is available when needed and limited transactions discourage removing funds. Short-term bonds typically yield higher interest rates than money market funds. So the potential to earn more income over time is greater. So when we're thinking about the short-term needs, how liquid is the fund versus trying to basically hedge the portfolio possibly with bonds and cash-related funds to hedge out against say equities possibly. Those are two different needs that we want to be considering. Overall short-term bonds appear to be a better investment than money market funds. Thank you.