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Is a 5% Money Market A Growth Investment?

Is a 5% Money Market A Growth Investment?

March 25, 2024

Most of us have seen, and probably own, some money market funds that pays 5% interest. This interest payment is substantially more than we have seen in recent years. Just a few years ago most money market funds were paying 0.5%.

But is the 5% money market a place to GROW your money?

Not really.

The Limitations of Money Market Funds as a Growth Strategy

It’s a safe investment, but not a growth investment. The principal is preserved, so that could be called safe. But the interest rate is about the level of inflation, so the value of your account is NOT growing spending power. The account is ONLY keeping pace in terms of buying power. 

The idea of keeping pace with buying power is the WHOLE BALLGAME when it comes to one of the biggest goals for most families -- retirement planning. When we plan for retirement, we work to clarify what we will NEED and WANT to spend after we stop working for money. And the retirement plan is focused on being able to provide the money when it’s needed.

That’s why one of the things I focus on in a retirement plan is saving money, and then growing the money faster than the rate of inflation to build up the most buying power possible to meet the clients’ needs in retirement.

And, since the money is for AFTER the client has stopped working for money, we want to be sure that the money grows consistently. We don’t want to go backward. And the worry about the possibility of losing market value in an investment account can lead some people to make bad choices.

Over the last 100 years, the S&P 500 Index of the 500 largest companies in the U.S. stock market has grown about 10.5% per year. The historical inflation rate is about 3% per year. So, stocks tend to grow noticeably faster than inflation over time. Stocks are a great tool for growing your savings.

But stocks are volatile. The daily PRICE of stock fluctuates a lot. The chart below shows that the S&P 500 has an average price drop of 14.2% some time during each calendar year since 1980. At the same time, the index has grown at an average rate of 11.76% with dividends reinvested over the same time period.

Financial Planning Strategy Image

Understanding the Importance of Growth in Retirement Planning

The volatility of stocks can lead everyday investors to make some bad choices which creates what many people in the financial planning world call the Behavior Gap.

Financial Growth and Planning Concept

Historical research has proven that over time investments will perform better than investment accounts owned by investors. This is because humans tend to buy when it’s comfortable (prices are high and rising) and then sell when it’s uncomfortable (prices are low and falling). This behavior creates the gap between potential returns and actual returns.

It’s my hope that I can help all my clients avoid making these kinds of mistakes.

This is one reason I invested in training and continuing education to earn the Behavioral Financial Advisor designation. I hope this work makes me more effective.

One technique I use to help clients get better long-term results is to sort investments into buckets based on timelines.

Navigating Investment Volatility and Behavioral Biases for Long-Term Success

Short Term money – Next 12 months – Own cash and money markets. Safe. Keeping pace with inflation. No real growth over the longer term.

Mid Term Goals – 18 months to 3 years – Own diversified income investments and dividend paying stocks. Expect to get 1% or 2% more interest than the inflation rate but still stable principal.

Goals More than 3 years. Own diversified stock investments. Expect to grow 3%-5% faster than inflation. Growth is compounded over time to build up more spending power for the future.

If you think that maybe you have too much long-term money invested in short-term investments, It might make sense to visit with an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor in West Saint Paul, Minnesota to help better understand your options. I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.

I am a financial planner who is an advocate for my clients ALL THE TIME – a fiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.

And yes, I’m still taking on a few great families to be part of my financial planning practice in West Saint Paul, Minnesota and, thanks to Zoom, across the country.

Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.