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Conservative investing has a bad reputation. It's considered boring and staid. Reportedly, no one is interested in earning guaranteed low returns when they could chase higher returns elsewhere. The problem is those higher returns are not guaranteed. They can vanish in a matter of days or even hours, given the right market conditions. There is a lot to be said for a conservative investing philosophy. Savers have access to unique opportunities like high yield money market accounts.
How The Money Market Works
The money market is made up of banks, corporations, firms and other business entities that need cash. These participants make short-term loans to cover each others temporary needs. Liquidity, the ability to quickly convert assets into cash, is everything. The loans made in this market pay interest and are usually repaid within a few days. This market is critical to the economy because it provides cash almost on-demand. An organization facing a potential shortage of cash can go to the money market and request as much as they can borrow.
Since these loans are debt instruments, they are considered fixed income. Investors who open money market accounts are paid the interest from these instruments as they are bought and sold by their bank. These interest rates can be much higher than the rates offered by regular savings account. The downside is that most money market accounts have minimum balance requirements. In addition, most limit the number of withdrawals that can be made during the month.
Money market accounts are insured by the Federal Deposit Insurance Corporation or FDIC. They are a safe, liquid way to store cash until it is needed later. A different way of gaining access to the money market is the money market fund. This is a mutual fund that invests in money market loans. Unlike a money market account, the fund is not insured by the FDIC and is therefore riskier.
High Yield Money Market Accounts
The yields on money market accounts move up or down in tandem with prevailing economic conditions. Sometimes they may be no better than a savings account and earn hardly any interest at all. Overall, the times when interest is high more than compensates for the times when interest is low.
Savers should keep in mind that high yields do not only come from high rates. How often the account compounds is also an important factor. An account that compounds on a monthly basis will not yield as much as an account that compounds on a weekly or daily basis. High yields plus compounding daily equals a higher total return.
Many people seeking high yield money market accounts have turned to online banks. Banks that operate online offer higher overall rates that non-Internet banks. An online money market account combined with daily compounding has the potential to provide decent returns and guaranteed safety for cash deposits.