Flight to Safety

Question: My wife and I are very cautious with our money--we have only one loan (our mortgage), we pay off credit cards every month, and we have more than 6 months of living expenses saved... BUT it's in a financial firm's money market account. We also have IRAs and "deferred compensation" saved in mutual funds.

The recent near collapse of Bear Stearns echoed the bank runs of '29 and the collapse of markets. It's an uneasy time--world markets seem unstable, inflation in energy and food costs etc... Should we be worried about having money saved in non-FDIC backed instruments? Worried in Ann Arbor. Jim

Answer: It is an uneasy time, especially with the Bear Stearns meltdown and takeover. But you are in a good financial situation to ride out the storm.

The answer to your question involves shades of risk. Let's look at your money market mutual fund. Every once in awhile, during tumultuous financial periods like now, the mutual fund industry is roiled by fear that a fund will "break a buck." The promise of a money market mutual fund is that if you put a dollar into it, you will at minimum get a buck back at withdrawal. As far as I am aware, no major money market mutual fund has fallen so much that withdrawals have been worth less than a buck. However, I am aware that in some cases where the parent company has injected cash into the money market mutual fund to preserve its value.

What to do about this? I always recommend a two-fold strategy. First, investors should put their money market money into a brand-name financial institution with the resources to support a money market mutual fund if it becomes necessary. Second, I would put my money into the most conservative money market option offered by the financial institution. The fund's assets should be primarily in very high quality short-term securities, such as U.S. government short-term debt and U.S. government agency debt.

If you believe that even after these two safety screens, a money market mutual fund is too risky, I would put my money in one of two places (or both): Keep it at a bank in FDIC insured accounts, such as certificates of deposit, a savings account or a bank money market deposit account. Or buy default-free U.S. Treasury bills directly from the government. It's easy to do. Check it out at www.treasurydirect.gov.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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