MONEY FUNDS BROUGHT MANY PEOPLE INTO INVESTING

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

When Jim Benham established the first money market mutual fund for people in 1972, little did he know his invention would be one of the most potent forces in bringing millions of ordinary Americans into the stock market and helping to fuel the longest bull market ever.

Money market funds pool people's investments and invest them in short-term, money-market instruments such as commercial paper, bankers' acceptances, government securities, certificates of deposit and other highly liquid and stable securities. These funds pay interest rates that vary depending on rates in the money market.

In the early 1970s, the onset of double-digit inflation, combined with regulations limiting how much banks could pay depositors, meant money in the bank was rapidly losing purchasing power. Alternatives were few: Treasury bills paid as much as 16 percent, but you needed $10,000 to buy one. The average bank deposit at that time was less than $3,000. Going straight from bank deposits into the stock market was unheard of.

Benham thought money market funds would give people who had never had their money anywhere other than a bank an almost risk-free entry into investing. They allowed small investors to earn yields that more or less followed inflation.

People at first moved carefully; eventually, they began pouring money into money funds, which ended up being good for the country as a whole. It contributed to the lifting of restrictions on how much interest banks could pay and also encouraged capital formation. In turn, U.S. industry became more efficient, and living standards improved.

Eventually, however, interest rates began to fall, but instead of heading back to banks, many of these new investors began looking at conservative investments, such as mutual funds that invested in government bonds. Investors gradually became more savvy and began searching out other funds that met their needs, eventually adding stocks to their portfolios.

Today, there are more than 1,000 money market funds, with assets of more than $1 trillion. Nearly 8,000 mutual funds exist, with assets of more than $5 trillion, and individual investors have more than $5.5 trillion invested in stocks.

What began as a small idea opened the door to a myriad of opportunities, enabling individual investors to achieve the dream of financial security.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.