“It’s just like . . .”
Those words usually signal that someone is seeking to get you to try something different. Often, they add these words – “but it’s better!”
When you find out that what they’re referring to is a soy protein and wheat gluten patty—with a hint of methylcellulose and disodium inosinate—that “tastes just like a hamburger,” most people will pass. In fact, if you sit down for dinner at Thanksgiving at your in-law’s house and are offered tofurkey, you might consider this to be downright unforgivable.
For some reason, though, many don’t apply the same skepticism to financial products. They are too ready to believe a salesperson’s claims about “It’s the same, but better.” People don’t seem to be programmed with an automatic revulsion to this form of “try it, you’ll like it.”
How Safe Is That Fund?
“It’s just like a money market, only better,” might be the most dangerous claim to believe. These products often have a higher yield than money market accounts, and yields are nearly always higher than cash vehicles which have FDIC coverage.
But the extra yield isn’t free, it comes because these products have inherently more risk. Instead of ingredients like methylcellulose and disodium inosinate, what gets added are doses of interest rate risk and credit risk.
The “It’s just like a money market, only better” products have proven dangerous in the past. One well-known financial services company settled with the SEC in 2011 for promoting a similar fund that blew up. The New York Times noted that this firm “vigorously marketed (it) as ‘a cash alternative for investors.” The fund lost nearly half its value–$1.1 billion over two years.
The company attempted to defend itself by releasing a statement that included: “The decline . . . was the result of an unprecedented and unforeseeable credit crisis and market collapse. Until the credit crisis, (the fund) was consistently one of the top performing funds in its category for eight years.”
It’s not comforting that a financial services firm claimed it shouldn’t have been expected to understand that the fund it marketed as a cash alternative would not act as a cash alternative exactly at the time it needed to act like cash. People choose to hold cash so that they will have it available when liquidity is low. In other words, you want access to your cash when you can most use it. Having nearly half of it disappear is not acceptable.
We Don’t Chase Yields
At AFIA, we don’t claim to know things like where we are in “the market cycle” and how high interest rates will go. We do think that it is always smart to be safe. And we’re concerned that the time might be ripe for the “it’s just like a money market, only better” sales pitch.
We don’t believe that holding cash will result in great returns for our clients. We do, however, hold cash for many of our clients because we want it available when we think it will be most useful. That’s why we’re not willing to chase yields on cash instruments.
Nobody who ever said, “I can’t believe it’s not butter” truly believed it was butter. They may have been disappointed after tasting it, but they didn’t experience heartburn like having a chunk of their savings disappear.
Eric Ball, CFA®
Chief Executive Officer
America First Investment Advisors, LLC
This post expresses the views of the author as of the date of publication. America First Investment Advisors has no obligation to update the information in it. Be aware that past performance is no indication of future performance, and that wherever there is the potential for profit there is also the possibility of loss.