Breaking the buck is a financial earthquake in what's supposed to be the safest corner of the investment world. The term almost exclusively applies to Money Market Fund (MMF)s, which are designed to be ultra-stable investments that always maintain a Net Asset Value (NAV) of $1.00 per share. Think of it like a savings account in investment form. When an MMF “breaks the buck,” it means its NAV has fallen below that magic $1.00 mark—say, to $0.99 or $0.97. This signifies that the fund has suffered losses on its underlying investments and can no longer guarantee that investors will get all their principal back. It’s a rare event, but when it happens, it sends shockwaves through the financial system because it shatters the illusion of absolute safety that these funds are built upon.
You might think, “So I lose a penny on the dollar, what's the big deal?” In the world of MMFs, it’s a massive deal. These funds are the bedrock for corporate treasurers and individual investors to park their cash. The entire system is built on trust and the unwavering belief in that $1.00 NAV.
Breaking the buck is a psychological blow. It’s like discovering your “unbreakable” piggy bank has a crack in it. Investors treat MMFs as cash equivalents—a place to hold money for payroll, daily expenses, or just to keep it safe. When a fund breaks the buck, panic can set in. Investors, fearing they might lose their money, rush to withdraw their cash en masse. This can trigger a “run” on not just the one failing fund, but on all money market funds, as nobody wants to be the last one out the door. This mass withdrawal can freeze up the short-term credit markets, which businesses rely on to function day-to-day.
MMFs invest in what are supposed to be the safest, most liquid short-term debt instruments available: things like government Treasury Bills, bank debt, and Commercial Paper from high-quality corporations. For a fund's NAV to drop, it means these “rock-solid” assets are in trouble. Therefore, a fund breaking the buck is a giant red flag—a canary in the coal mine—signaling deep-seated problems in the credit markets and the broader economy. It tells investors that the foundational level of the financial system is under severe stress.
The most notorious example of breaking the buck occurred during the 2008 financial crisis. On September 16, 2008, one day after the investment bank Lehman Brothers filed for bankruptcy, the Reserve Primary Fund—the oldest money market fund in the U.S.—announced its NAV had fallen to $0.97. The fund held a significant amount of commercial paper issued by Lehman Brothers. When Lehman collapsed, that paper became nearly worthless, inflicting a heavy loss on the fund. The news triggered a financial tsunami. Investors pulled over $300 billion out of prime money market funds in a single week. The panic was so severe that the U.S. Treasury had to step in and offer a temporary government guarantee on all MMF balances to prevent a complete meltdown of the short-term lending market.
For value investors, the concept of breaking the buck reinforces one of Warren Buffett's most famous maxims: Rule #1: Never lose money. Rule #2: Never forget Rule #1. While MMFs are generally considered a safe haven for cash, the Reserve Primary Fund saga is a powerful lesson that no investment is 100% risk-free. It highlights the critical importance of understanding what you own, even in supposedly “boring” investments. A value investor knows that behind every share price is a real, tangible asset. In the case of an MMF, those assets are debt securities. If the issuers of that debt go bust, the fund takes a hit. Since 2008, regulations have been tightened to make MMFs more resilient. Many institutional funds now have a floating NAV (meaning their price can fluctuate slightly) and tools like “redemption gates” to prevent runs. However, the core lesson remains: always do your homework and never take safety for granted. True value investing isn't just about finding undervalued stocks; it's about rigorously assessing risk in every part of your portfolio, including the cash you've set aside.