Marketplace Scratch Pad

I want you back

Scott Jagow Aug 12, 2009

Some people broke up with their 401(k)s last year, but it looks like the romance has been rekindled. For the first time in four quarters, Fidelity investors increased the amount they put into their retirement accounts rather than dropping the percentage. I guess they were tired of getting no love from their money market fund.

Nearly a quarter of money market funds are returning nothing. From USA Today:

The average money fund yielded an annualized 0.08% the week ended Aug. 4, the latest data from iMoneyNet, which tracks funds, show. At that rate, a $10,000 investment would return 15 cents a week. But 275 taxable funds have no yield, 23% of the 1,180 funds iMoneyNet tracks.

But if you timed the rally and got back into stocks, good for you. From AP:

Investors who managed to sock away more (into their retirement accounts) have been rewarded, with the Standard & Poor’s stock index rising more than 15 percent in the second quarter. Those who responded to last year’s market plunge by moving money into more conservative money-market funds and Treasury bonds missed out on the rally.

“Workers with a long-term view who stayed the course have been rewarded with a very nice bounce,” said Scott David, president of workplace saving at Fidelity…

It’s nice if you’re young enough to have the luxury of waiting out the storm. But I don’t blame people close to retirement for taking their money out of the stock market last year. Zero return is better than -40%.

I’m also a little leery that this latest stock market boom will last. I’d call it a healthy skepticism. This morning, I pointed out a Fortune story that asked whether all that cash the Fed has pumped into the markets is creating a bubble in stocks. Here’s more from the article:

“This is the most speculative momentum-driven equity market since the early 1930s,” Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday…

“Many observers are wondering whether the strong stock market rebound since mid-March is already a forerunner of the next recovery or simply driven by a reflux of liquidity into riskier asset markets,” Deutsche Bank Research analyst Sebastian Becker wrote in a report last month.

Rosenberg, who notes that consumer credit has dropped an unprecedented five straight months, said it’s far from clear the recession is over. He says the risk of a market relapse later this year is high.

If that’s the case, for some, another divorce from their 401(k) might be in order. Also, at the first sign of inflation, the Fed is likely to raise interest rates, so those money market funds may not be frozen too much longer.

If you don’t mind sharing, I’d love to hear what kind of strategy you’re employing.

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