Breaking A Buck

As you know, money market funds maintain their per share price at $1, making it almost impossible for investors to lose money. Nevertheless, one fund, Reserve, saw its shares fall below $1 back in 2008. It happened when an unanticipated and large number of institutional investors cashed in their shares.

Why you may ask? Because the fund was holding securities issued by Lehman Bros. Remember Lehman? It went under in September of that year and the overwhelming Reserve redemptions forced the fund's per share price down to 97 cents. That's known as "breaking a buck."

The New Regulations

New SEC rules will be phased in through the year. The four most significant for you to know about are:

(1) Money funds must now have 10% of their assets in either cash or investments that can be converted into cash within one day.

(2) They must have 30% of their assets in investments that can be converted into cash within a week.

Note: Both #1 and #2 will protect the funds against being overwhelmed by redemption requests, as was the case with Reserve.

(3) They can place only 3% of their portfolio in investments that are not of the highest quality. (Previously it was 5%.)

(4) The mandatory maturity time frame for a fund's average portfolio has been reduced from 90 days to 60 days.

$TIP: Keep in mind that longer-term investments pay higher yields, so these SEC requirement may mean lower rates, although rates can't get much lower (see list below)!

Money Market Funds vs Bank CDs

Money market funds are not FDIC insured. Bank CDs are. If you can tie up your money for six months or longer, you'll receive a higher yield with CDs. On the other hand, if you need continual access to your savings (or a portion of your savings), stick with a money market fund.

Given that the taxable money market funds are all in the 0.08% to 0.29%, I see no point in listing them.

On the other hand, three bank CDs will give you a higher return:

Six-month: NewDominionDirect.com, 1.37%

One-year:  NewDominionDirect.com, 1.82%

Two-year: NewDominionDirect.com, 2.21%

Until next week...

- Nancy Dunnan