Of Mutual Interest |David Pitt

Is your money market fund causing you to lose sleep? You're not alone

September 21, 2008
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Industrial engineer Peter Miter of Doylestown, Pa., is like millions of American investors who had retirement money invested in the stock market, but sought the safe refuge of money market funds recently when stocks became too volatile.

"Hearing that the banks and AIG, solid institutions are going under, I'm wondering where can I put my money where it's secure," said Miter, 52. He's worried that money market funds may not be the safe haven he thought.

The safety of money markets has been the hallmark feature of the funds.

The money market world shuddered after Reserve Management Co. said Tuesday the value of $785 million in unsecured debt issued by Lehman Brothers Holdings Inc. had been written down to zero in its Reserve Primary Fund. The fund's managers were swamped by investors wanting to pull their money. Spokeswoman Ming Lee Hatch said fund assets plunged from $65 billion on Aug. 31 to $23 billion. All told, the value of the fund's holdings dropped to 97 cents for each $1 put in by investors.

It was only the second time in four decades that a fund couldn't assure the full value of clients investments.

Greg McBride, senior financial analyst at, stressed the point that many industry analysts were making Thursday: Money market funds are safe. Most investors' funds are with large mutual fund or brokerage companies that would do everything in their power to preserve the dollar-for-dollar value.

After all, the idea behind the money market mutual fund was that it would invest in safe debt issued by the government and solid corporations. These funds typically pay an interest rate above what could be earned in a savings account, but also allow investors access to their money. Some funds, however, have moved to boost returns by moving toward riskier investments.

The Reserve Primary Fund had shown an average 12-month yield of around 4 percent, the highest among the 2,100 funds tracked by Morningstar Inc. The average for the other funds was around 2.75, said Karen Dolan, Morningstar's director of fund analysis.

Higher than typical returns should be a warning sign for investors, she said. There are options to consider if your money market is keeping you awake:

  • Move the money into a US Treasury money fund. The upside is that it removes the exposure your current fund may have to corporate debt. The downside is you'll take a bit of a hit in yield on the government instruments.

  • Park your money in a bank money market deposit account or savings account. This carries two advantages. The money is covered by the Federal Deposit Insurance Corp. Another plus, the yield at some banks is about 3.5 percent.

    Peter Rizzo, senior director at Standard & Poor's, said panic withdrawal can only complicate things by forcing fund managers to sell assets under duress.

    David Pitt writes for the Associated Press. Mark Jewell contributed to this report.

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