6
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Fund Family Shareholder Association
happen according to plan or a regu-
lar schedule. Just this past month, I had
to have a tree taken out of my backyard
in an emergency. That cost me a pretty
penny. Having money set aside for the
unexpected isn’t pessimistic; it’s pru-
dent. Not only will having ready cash
make a stressful situation less stressful,
it also means you’ll be less likely to
disrupt your carefully made long-range
investment plans.
In my mind, an emergency fund
equivalent to six to 12 or even 24
months of living expenses is the foun-
dation of any savings and investment
plan. The safety and liquidity of money
market funds, particularly Vanguard’s,
make them ideal vehicles for this role.
You may have to “top up” your emer-
gency fund from time to time, as infla-
tion or a change in lifestyle may have
caused your expenses to rise, but that
is far better than finding your safety net
has been cut out from under you by a
tumbling stock market.
Hopefully you’ll never have to tap
your rainy day fund, kind of like insur-
ance. But a money market fund is also
useful for near-term expenses you are
already expecting. I am often asked
questions like, “Where should I invest
the $200,000 I have for buying a house
this year?” If your time horizon is short
and
you can’t make up the difference
if you lose any of the money you’ve
saved, then the answer really is to keep
it in cash—a money market fund or
FDIC-insured bank account. It’s the
only place where you can put a dollar
in and get a dollar out on a daily basis.
(A certificate of deposit, or CD, could
work as well, but your money will be
locked up for whatever period you’ve
chosen for that CD.) I can’t recommend
anything else in good conscience. If
your time horizon is longer—say, two
or three years—you may have more
options, like a short-duration bond
fund. (See the box on page 5 for more
on short-term funds.) But again, it’s a
matter of knowing how much money
you’re willing to risk losing, even if it’s
a small amount. Every dollar counts
when you’re house-hunting in a hot
market, for instance.
Plus, money funds are incredibly
convenient and simple to use. As a
conduit, money funds are a power-
ful money-management tool. You can
write checks on them. You can wire
money into and out of them. You can
use them to move money into and out
of your Vanguard funds. You can direct
distributions from other funds into your
money market fund.
If you’re like me, you occasionally
need to extract some money from your
Vanguard investments to help pay the
bills. You don’t need to transfer money
to a checking account. Writing a check
from your money market account is
easy. I do it all the time. Unlike writing
a check on a bond fund, a check written
on a money market fund doesn’t create
a taxable event that must be reported
to the IRS. Just confirm you have
enough assets in your money market
fund first, otherwise you’ll need to sell
some bond or stock fund shares (which
could impact your tax bill) and have
the money transferred into your money
market.
Money market funds are practical
for systematic investment plans, like
dollar-cost averaging or value-averag-
ing. Your money continues to earn a
smidge of interest, remains completely
safe, and can be moved with ease into
another fund when the time comes.
In taxable accounts, I have long
recommended (and practiced) having
distributions, whether they are monthly
income from your bond fund or year-
end capital gains, deposited automati-
cally into your money market fund.
This money becomes instantly avail-
able should you need to write a check
on it. It allows you to reallocate or
rebalance without having to sell fund
shares. This is helpful if you rebalance
Expense Headwind Pushes Money Market
Annuity in Reverse
MONEY MARKET ANNUITY
IS A BIT OF A DIFFERENT ANIMAL. The portfolio is run, like
Vanguard’s other money funds, with the goal of a stable $1.00 NAV, safety and liquidity first.
However, unlike its other money funds, Vanguard Money Market Annuity has additional insur-
ance-related expenses to contend with. And for several years now, its portfolio’s meager yields
have been overwhelmed by those expenses, resulting in negative returns for investors.
By Vanguard’s account, in the most recent annual report for its annuity products, the Money
Market Portfolio delivered positive performance of 0.11% in 2013. This beat peers and an
expense-free benchmark, all while maintaining a $1.00 NAV. However, that return was not
enough to cover the cost of the annuity contract investors must pay for. As a result, after
accounting for fees, Money Market Annuity lost -0.19% in 2013. This year isn’t shaping up to
be much better, with the annuity off 0.13% so
far. (This is also reflected in the negative yield
shown in the table on page 4.)
It’s been a tough five-year stretch for Money
Market Annuity. The annuity product is priced
at AUV, or accumulated unit value, which adds
all income and subtracts all expenses from its
share price on a daily basis. As you can see in
the chart to the right, Money Market Annuity’s
AUV has been gradually slipping since Dec.
2009. In fact, Money Market Annuity’s three-
year return turned negative on January 24,
2012, and its five-year return fell into the red
on November 29, 2013.
The underlying portfolio may have met
Vanguard’s expectations, but the actual client experience has been disappointing—to say the
least. Performance-eroding expenses combined with near-zero yields make this an unattractive
option. I do not recommend using Money Market Annuity. Period.
MM Annuity’s Tumble
2/09
8/09
2/10
8/10
2/11
8/11
2/12
8/12
2/13
8/13
2/14
8/14
Value
tops out
8/14/09
Stops
falling
7/19/10
Value starts falling
12/1/09
3-year return
goes negative
1/24/12
$1.900
$1.902
$1.904
$1.906
$1.908
$1.910
$1.912
$1.914
$1.916
Value falling again
9/15/10
5-year
return goes
negative
11/29/13
>
