Money Market Fund Risk?

[realist]

How much risk is there to a money market fund? I moved some money out of mine out of equity funds, and then later into a savings account because at the time (I was considering buying a house and therefore had a very short time horizon) the market was looking dicey, and I didn't really want to accept *any* level of risk. How paranoid was I being? Is it actually possible to have a money market fund lose money, or was I misunderstanding how it works?

[CanadianCapitalist]

Yes, it is possible. Back in 2008, many money market mutual funds in the US were on the verge of losing money because the commercial paper market seized up. So, yes, there is risk in money market funds.

If I wanted my cash to be absolutely safe, I would keep it in an account with deposit insurance.

[brad]

Wikipedia actually has a pretty good explanation of how those funds got into trouble in 2008: http://en.wikipedia.org/wiki/Money_market_fund

My feeling is that in the long term, conservative investments are the riskiest because they're almost guaranteed to lose value over time, since they'll be outpaced by inflation. But at least their value can't decline all the way to zero.

[larry81]

I put my money is money market mutual fund (ATL500, MIP501, MIP701 RBF2001, DYN500 etc)

Limit of 100k by fund so the $$$ is CIDC insured

[CanadianCapitalist]

I put my money is money market mutual fund (ATL500, MIP501, MIP701 RBF2001, DYN500 etc)

Limit of 100k by fund so the $$$ is CIDC insured

Just a small correction: all of these are high interest savings accounts, not money market mutual funds. But you can buy and sell them just like mutual funds.

[realist]

Wikipedia actually has a pretty good explanation of how those funds got into trouble in 2008: http://en.wikipedia.org/wiki/Money_market_fund

My feeling is that in the long term, conservative investments are the riskiest because they're almost guaranteed to lose value over time, since they'll be outpaced by inflation. But at least their value can't decline all the way to zero.

Thanks that was informative, and confirmed my impressions.

I find it interesting how often the mantra of "inflation will erode your savings" is used. I think for a significant portion of the population the act of actually saving *something* is probably more important than the ROI. Obviously most CMF posters probably don't fall into the "average person" category. Does inflation eat away at a conservative investment more or less than the MER charged to investors who lack the savvy to differentiate between mutual funds? Losses to ill timed fluctuations? In some cases I think it encourages people to take on more risk than their situation can actually tolerate.