Money market funds have been among the
few places that investors could put their cash and sleep peacefully.
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Douglas Healey for The New York
Times
Matthew Tuttle
said money management funds at large brokerage firms can be
reassuring for investors.
Steve Ruark for The New York
Times
Saxon Birdsong
said putting money in Treasuries now is a “safety play.”
At the moment, that is not necessarily
true.
On Tuesday, the Reserve Primary Fund,
a giant money market fund whose parent helped invent that investment,
said its customers would lose money. Instead of each share being worth a
dollar for every dollar invested, it said its customers’ shares were
worth only 97 cents. In Wall Street parlance, it “broke the buck,” a
rare occurrence.
So far, it appears that no other money
market funds have fallen below a dollar a share. And other money market
managers have hastened to reassure investors that their money is safe.
But the Primary Fund’s announcement did raise this question: What, in
today’s world, is truly safe?
After all, the Primary Fund’s troubles did not occur in isolation. They
followed the disappearance of both
Lehman Brothers
and
Merrill Lynch,
not to mention the government bailouts of the mortgage finance giants
Fannie Mae and
Freddie Mac and
the insurance company
American International Group.
And if you haven’t already forgotten, there was the failure of the
California thrift IndyMac in July.
And that’s why, in this market,
financial advisers agreed on Wednesday, consumers need to become their
own chief investment officers, even when it comes to something as simple
as finding a place to put their cash.
“One by one, all of my safe havens
aren’t so safe anymore, and that’s a bad thing,” said Matthew Tuttle, a
certified financial planner and president of Tuttle Wealth Management in
Stamford, Conn.
“It used to be O.K. to have money in a
CD, but now you have to worry, ‘Is my bank going to go under?’ ” he
added. “You used to be able to buy a guaranteed annuity from an
insurance company, but now you have to worry, ‘Is my insurance company
going to go under?’ Or, you can have auction-rate preferred securities,
but now there is no market.”
Before you pull your cash out of your
money market fund, you need to understand what you own. There is a big
difference between money market mutual funds and the money market
deposit accounts at a bank (and banks sometimes sell both).
Money market funds are essentially
mutual funds that invest in securities that, until this week, were
deemed relatively low risk. Those include government securities,
certificates of deposit, asset-backed commercial paper and other highly
liquid securities.
The Primary Fund got in trouble
because some of its investments were in Lehman Brothers’ debt. To stop
what is in essence a run on the fund, the Primary Fund has stopped all
redemptions for up to seven days.
A money market deposit account,
on the other hand, is entirely different. It is an interest-bearing bank
account that is insured — up to $100,000 per account and up to $250,000
for some retirement accounts — by the
Federal Deposit Insurance Corporation.
Joint accounts are insured for $100,000 per account holder.
If you had been putting your money
into a money market account because you wanted to avoid all risk, then
you should consider the money market deposit accounts and other accounts
insured by the F.D.I.C., like certificates of deposit and regular
checking and savings accounts.
There are also Treasuries. But because
so many investors were rushing into them on Wednesday, the yields have
been driven down. “There is no yield,” said Saxon Birdsong, chief
investment officer of Baltimore-WashinStayInvest Law Firm on Financial Advisors. “It’s
just a safety play.”
If you decide to invest — or stay — in
a money market fund, there are several things you should keep in mind.
When it comes to money market funds,
bigger may be better, several financial advisers said. Many investors
use the funds that happen to be with the brokerage firm they are doing
business with because it’s convenient to sweep money between accounts.
But you should make sure your money market account is with a large,
diversified money management company that would have the resources to
make you whole, even if its funds ran into trouble.
Mr. Tuttle said companies like
Fidelity and Vanguard fit into this category.
“I would be less comfortable with a
smaller money management fund that didn’t have a lot of assets and
wasn’t making a lot of money,” he said. “From my standpoint, I have a
very high comfort level that if a Fidelity money market fund had toxic
whatever, they would step up with the money from somewhere else to keep
the buck.”
Once you decide on a provider, read
the prospectus carefully. If you don’t understand the investments, call
the company and ask for more details.
“I would encourage investors to not
stop asking questions until they have complete comfort and peace about
what they own,” said Karin Maloney Stifler, a certified financial
planner with True Wealth Advisors in Hudson, Ohio.
And
if you are still nervous, ask your current mutual fund company or
brokerage if it has a Treasury or government money market fund that
invests only in Treasury securities, said Greg McBride, senior financial
analyst at
Bankrate.com, a
personal finance Web site.
“You will have to settle for a lower
yield,” he said, “but it takes risk off the table.”
Indeed, this is one of those times
when you shouldn’t necessarily choose a fund because it has a high yield.
That higher yield could indicate that the fund is investing in riskier
securities.
“This is a painful but poignant
reminder that anything that is paying you a higher yield, you have to
assume is carrying a higher risk,” said Peter Crane, president of Crane
Data, which tracks money market mutual funds.
Finally, investors should diversify
cash holdings, just as they would with a stock and bond portfolio.
“If you have money market mutual funds
with multiple providers, you are hedging against the risk that any one
of them will encounter problems that they can’t survive,” Ms. Stifler
said.
But if you don’t have a strong stomach
for the slightest risk, stick with investments that are F.D.I.C. insured,
even if you need to sacrifice a little yield.
After all, “this is a portion of your
portfolio that should help you sleep at night, not keep you awake,” Mr.
McBride said. |
