Ask the expert: Shifting between money market accounts and the stock market
February 08, 2011
Q: Stocks are up. Money market rates are down. Any reason I shouldn't be moving more of money out of the money market account into stocks?
A: With the stock market soaring while money market rates languish near zero (at an average of 0.22 percent, according to the FDIC), it might be tempting for depositors to look at the stock market as a much greener pasture right now. Indeed, part of the stock market's success might be fueled by the fact that unnaturally low interest rates have forced people to look for alternatives.
Still, while investing is fundamentally about making choices between different alternatives, the stock market is not exactly a close substitute for money market accounts. Moving money between the two would represent a significant shift in risk. Before you do that, think about the following:
- The stock market is close to a 52-week high, having risen more than 20 percent over the past year. That's what makes it look attractive, but that's also what makes it considerably more risky than it was a year ago. Remember how many people have gotten into trouble over the past dozen years chasing hot markets--dot-coms, real estate, oil, etc.
- There is a long-running debate about active vs. passive asset allocation, with valid arguments on both sides. You might benefit by taking a page from both books. Leave yourself room to make allocation decisions in light of market conditions, but limit these decisions to a range which is based on your long-term goals. This will give you some flexibility, but prevent you from getting too far off track by switching courses at the wrong time.
At the very least, take action by shopping for the best money market rates you can find. They may not compete with a hot stock market, but they can add a full percentage point or more above average money market rates.
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