After the credit crisis began to spread earlier last year and kicked financial exchange traded funds (ETFs) left and right, investors increasingly began to look toward traditionally “safe” investments – including money markets.
But this week, the Reserve Primary Fund “broke the buck” after its shares fell to 97 cents because of exposure to Lehman Brothers (LEH). Money market managers immediately rushed to reassure their investors that their money is safe. Still, it has investors asking what really is safe these days?
At least for now, the government is guaranteeing money market funds against losses up to $50 billion, giving short-term comfort to investors, reports Diana B. Henriques for the New York Times. These funds currently hold $3.4 trillion in investor funds, down nearly $170 billion from the week before. This temporary government move may help alleviate concerns for the time being.
Many financial advisors are agreeing that investors need to become their own chief investment officers as they look for safe havens, says Tara Siegel Bernard for the New York Times. Before you rush to pull your money out of money markets, though, it’s important to understand the differences.
Money market funds are not money market deposit accounts at a bank (which are FDIC insured up to $100,000 per depositor). Money market funds are mutual funds that invest in securities that before this week were said to be relatively low-risk: government securities, certificates of deposit, asset-backed commercial paper and other liquid securities.
Money market deposit accounts are interest-bearing bank accounts that are insured.
How can you protect yourself? Once you decide on a provider, read the propectus, and call if there’s something you don’t understand. One planner suggests that invesors ask and ask and ask until they are fully satisfied and comfortable with what they own.
This is a wise move, no matter where you’re looking to invest. Transparency is inherent in ETFs, by the way. You can visit a number of sources to easily research holdings and their weightings. It’s a great way to take charge of your investments and where your money goes.