Why Money Market Accounts Are a Sham


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A few weeks ago I called my bank. Exasperated, I explained that the 0.3 percent annual interest being earned in my money market account was ridiculous.

Now, I know it's really not the bank's fault. I'm well aware that 'Helicopter' Ben Bernanke and his low interest rate policy are the real culprits.

Nevertheless, I instructed the bank representative to take a significant portion of my money market account and transfer it to my $100k Portfolio .

In all fairness, the funds in this money market account were never intended to be an "investment." Rather, I've always figured that it's smart to keep some of my savings completely liquid - not in stocks or bonds.  

Keeping it on the sidelines means it's available for whatever unexpected events might occur.

It used to be that money in the bank would pay an annual interest rate of three to five percent. However, that's not the case today (and hasn't been for some time now).

With interest rates at 0.3 percent, the monthly interest I received on my money market account was a pittance.  Over 12 months, I could expect to earn enough to take my wife out for a light dinner, but not enough to even be considered real income. It's almost a rounding error.

Given the negligent yield, I began asking myself, "What's the real impact of holding funds in a savings account today?"

The government tells us that the Consumer Price Index - which measures the inflation in a basket of goods purchased by consumers - is growing at an annual rate of 3.6 percent. But that's just part of the story, since the CPI excludes gasoline which has risen over 30 percent over the last year and food items that have also increased significantly.  

When considering these items, it's likely that real inflation is increasing at a rate of closer to five percent a year.

The reason I'm telling you all of this it to make a very simple point.

In the savings account where I had money stashed away, I was earning a 0.3 percent yield. Compared with the rising costs of life as measured by CPI, my money was actually losing value in real dollar terms every year.  

Suppose you were reading The Wall Street Journal and you saw an advertisement from Citibank that said, "Deposit thousands of dollars today. You'll earn negative 3.3 percent over the next year, reducing your savings!"  Would you consider - even for a minute - opening an account?  I suspect not.

It's for this very reason that I'm withdrawing my savings from my bank.

Perhaps you don't have money in a savings account. But the same argument can be made for many other types of low-yield "safe" investments - Certificates of Deposit (CDs), municipal bonds, U.S. Treasuries, and even some corporate bonds.

The yields on these investments are so low that they aren't even keeping up with inflation. As a result, if you own any of these securities, the value of your savings sinks year after year.

The bad news is that there is no end in sight. Chairman Bernanke has made it clear that he has every intention to keep short-term interest rates where they are today - at zero percent - through at least 2013.  Keeping these rates so low is a direct ultimatum: buy riskier assets or lose money.

As savers, we have a choice to make. We can either see our savings dwindle, becoming worth less and less every month, or we can seek out attractively priced investments that are likely to deliver returns that exceed inflation.

The good news is that there is a better way forward. There are compelling opportunities today to invest in world-class stocks at the lowest valuations we've seen since March 2009.

For this reason, I've pulled a good portion of my cash savings out of the "safety" of my bank account and have added it in one lump sum to the $100k Portfolio .

If you're similarly starved for income from your "safe" investments, then I urge you to consider taking similar action today.

What will become of this money?

I'm going to 'Buy America' at a point when many financial pundits are saying our country is going down the drain. For investors with cash on the sidelines today, there are numerous attractive opportunities.

Keep an eye on your inbox. I'll be sending you updates on what I'm doing with this money in the $100K Portfolio over the coming weeks.

Disclosure: none

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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