It’s probably no surprise that after the crash of ’08-’09, there’s still a large amount of money “stuck” in money market funds. Conservative investors, lacking faith and trust in the markets, have piled an enormous amount of cash into money market funds because of the perceived safety that they offer. I’ve found that many savers and investors believe that there is some sort of guarantee behind their money market fund price remaining steady at $1.00 per share.
But, I wonder, how safe are money market funds really?
In 2008, money market savers got a nasty taste of a money market fund imploding when the Reserve Primary Fund “broke the buck.” Currently, the big threat is the domino effect fallout from the European Union. The EU is far from out of the woods, and should there be a default on EU debt, regardless of what U.S. bankers say, I believe money market funds here stateside will feel the heat and potentially lose considerable value.
I’ve studied the internal holdings of one of the largest U.S. money market funds (in terms of assets) and discovered that almost half of its assets were tied back to EU debt in some way. Be it French, Spanish, Italian, or Greek debt, it’s all correlated, which in this tricky environment can be disastrous to the owners of this huge and well-known money market fund.
Recently, Federal Reserve Chairman Ben Bernanke echoed my concern for money market stability, noting that: “Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration. The risk of runs . . . remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available.”
While a complete money market fund crash may be unlikely, smart investors should take stock of their savings in money markets and consider a few alternatives:
1) If you want money market funds, use only FDIC-insured funds.
2) Look at online bank high-yield savings accounts with FDIC backing.
3) For a better yield (and consequently more risk), look at ETFs that invest in emerging markets debt or TIPS.
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.
Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100. Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.