What are money market funds?

 The Federal Reserve is expected to hike interest rates by 1.5 percent by the end of July. With the SPDR S&P 500 ETF Trust down more than 20 percent from its peak, money market accounts could soon become more attractive to investors and savers in a volatile economic climate.

What exactly is a money market account?

A money market account is an account similar to a savings account, but may also include a debit card and checking services. Money market accounts are usually limited to six monthly transfers, but they can offer higher interest rates than regular savings accounts. The Protection of the Federal Deposit Insurance Corp. is up to $250,000 per money market account as long as the offering bank is FDIC-insured.

Why Money Market Accounts Matter: Ever since the 2008 financial crisis, interest rates have mostly been around 0 percent, making money market accounts unattractive for income investors. Money market rates rise as the US Federal Reserve hikes interest rates to fight inflation. Money market accounts currently pay up to 1.5 percent, according to Bankrate, but those rates are likely to rise further in the coming months.

Compared to the interest rates on the average savings or checking account, money market accounts can be particularly attractive. They're an extremely safe place to park excess money thanks to FDIC insurance. Also, with money market accounts, your money is not locked up like with certificates of deposit, and there are no fees to access your money at any time. In addition, checking and debit card services facilitate access and transactions.

Money market accounts and their downsides

Of course, money market accounts also have their downsides. Some banks and institutes require a high minimum amount in order to get the best interest rates and avoid expensive fees. Some high-yield savings accounts offer similar interest rates and come with fewer strings attached. There may also be opportunity costs associated with holding cash in a money market account. Historically, investors in stocks and bonds have achieved much higher returns over the long term. In addition, a 1.5 percent return on a money market account might not seem that great compared to the purchasing power the average saver loses when the consumer price index is up 8.6 percent year-on-year.

Choosing between a money market account and a high-yield savings account versus stocks or bonds may become a moot point if you also have credit card, auto, or other debt. It's almost always a good idea to pay off your debt before thinking about saving or investing. And remember, always pay off the debt with the highest interest rate first (usually credit card debt), even if it's not your largest debt.

How to prepare for the first bear market of your trading career!

In March 2020, investors experienced a bear market for the first time in more than a decade. If you blinked, you might have missed it. In about a month, the SPDR S&P 500 ETF Trust transitioned back into a bull market, making the 2020 sell-off the shortest bear market in U.S. history. Historically, S&P 500 bear markets have lasted about 13 months on average and have occurred about every 6.2 years. Investors who entered the market since 2009 only experienced the mini bear market of 2020. Investors new to the stock over the past year have only seen one bull market so far.

Below are eight tips for investors who want to make sure they are prepared for the first extended bear phase whenever it occurs.

1. Have enough cash for the near future

It may be tempting to put all your savings into stocks to buy the next bear market, but chances are the next bear market will last longer than 30 days. For example, the previous bear market phase in 2008 and 2009 lasted almost a year and a half. In the meantime, you'll need to set aside enough money to cover bills, groceries, rent, and emergency expenses.

2. Don't act on feelings

Seeing your account in the red every day for a year and a half can take a huge mental and emotional toll. You will likely experience the full spectrum of negative emotions, from anger to sadness to embarrassment and shame. There is nothing wrong with feeling these feelings. However, you should avoid trading based on these emotions. Investing should be a cool, calculated process based on logic and common sense, not an emotional patch to make you feel better after a bad day in the market.

3. Think longer term

Whether they lasted 33 days or 31 months, all past bear markets have one thing in common: they all came to an end at some point. The S&P 500 also reached a new all-time high after each bear market. Determining the exact timing of the bottom can be nearly impossible for even the most experienced traders. But investors who bought the S&P 500 at any point in each bear market were eventually able to make a profit. Patience is far more important than timing.

4. Keep some perspective

In the midst of a recession, it feels like the sky is falling. Whatever happens -- whether it's COVID-19, the mortgage market meltdown, or the bursting of the dot-com bubble -- it appears to be the greatest threat the economy has ever faced. In reality, the US economy has weathered wars, recessions, depressions, hyperinflation, stagflation, countless booms and busts, and now a pandemic. Bear markets are not a sign of the economic apocalypse. They are a healthy part of the natural market cycle.

5. Scatter is your friend

In most bear markets, the vast majority of stocks, sectors and investment themes take a hit. Some companies will inevitably go bankrupt and their stocks will go to zero. Some sectors or companies may be permanently impacted and significantly underperform the broader market in the recovery phase. To protect your portfolio both on the way down and on the way up, stay diversified by buying index funds or other diversified investments.

6. Now set an appropriate level of risk

Once the bear market has started, it is too late to avoid the negative effects. If you're nearing retirement age or planning to buy a home, get married, or make some other major financial expense, now is the time to reduce your risk before the market crashes.

Increase your cash balance by depositing the money in a high-yield savings account or certificate of deposit with an FDIC-insured bank. Your returns will be minimal given the low interest rate environment, but your cash holdings will help mitigate your short-term market risk.

7. Have a watch list

A strategy that has worked in every bear market phase in history is to bet on falling prices. But you don't have to think about what you want to buy at what price in real time.

Before the stock market dip begins, make a list of stocks you would like to own if the price is right. This watchlist will give you a clue as to where to look as the market sell-off gathers momentum. A targeted approach to buying stocks during a bear market can save time and minimize bad investments.

8. Tighten your margin

If you have $50,000 in cash in your account and borrow another $50,000 on margin to invest as well, a typical 30 percent bear market pullback would theoretically cost you 60 percent of your original $50,000. Also, margin calls could force you to sell stocks or funds at the worst possible time, when prices are at their lowest.

Margin stewardship is a sound investment strategy, but overly leveraged accounts can be particularly vulnerable in bear markets.

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