Clark Howard's Tips
October 31, 2007
There's a lot of turmoil in the savings world -- once considered the safest part of the market -- and much of it involves money market mutual funds.
Money market funds are not federally insured, but have historically been designed to be a safe place to put your money and allow you easy access to it when needed. The way they work is that you buy them for a dollar per share and then earn on every dollar with the change in interest rates.
There's a lot of turmoil in the savings world -- once considered the safest part of the market -- and much of it involves money market mutual funds.
Money market funds are not federally insured, but have historically been designed to be a safe place to put your money and allow you easy access to it when needed. The way they work is that you buy them for a dollar per share and then earn on every dollar with the change in interest rates.
They're often sold by mutual fund companies and stockbrokers, and have proven to be a safe haven for three decades. Money market funds obey the "don't break the buck" principle, which is like an unwritten law stating that they'll always be a dollar per share.
Now there are news reports about similar investment opportunities that mimic money market funds but take on additional risks.
Sentinel Management Group, for one, is sitting on nearly $1.6 billion in investments of this type and is not allowing people to get to their money. Other major players in the field have experienced a drop in value.
For example, Yield Plus is down five-and-a-half percent. Keep in mind that a true money market fund couldn't drop in value because it's always a buck. So how do you know if you have one of these impostors?
Clark says to beware if they have the word "plus" in their names. But Wall Street couldn't be happier that a lot of people have these cousins of traditional money market funds. After all, investors are being socked with higher fees for these new investments that are supposedly safe.
Clark wants everyone to look at their money market funds statement and know what they own. If you're in one of these fake money market funds, try putting your savings in CDs, a plain vanilla money market fund or a tax-free municipal bond. The latter works well for those in a high tax bracket who make more than $100,000 per year.
Meanwhile, for everyone else who lives paycheck to paycheck, retailers like Wal-Mart have hit tough times because their customer base doesn't have much expendable income. Looks like it might be a tough holiday season for retailers.
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