Sushi Money

Well.  Not much more to say after two days of heavy losses. The oft-said phrase of dubious origin comes to mind:  “May you live in interesting times.”  Something tells me we’ll be talking about this period with our grandchildren.  Maybe some of you already are!

The times are certainly interesting, if not downright frightening for so many people.  Between natural disasters and economic challenges we’ve got a full scale market panic on our hands.   You know where I stand, but I’m a glutton for punishment, right?  I’m just parked in that corner that sides with history, like the MarketWatch Guru, meaning staying invested for the long term.  If I had more money to invest I would be looking for bargains.

“So, if history is any guide, you would be foolish to succumb to panic. In fact, you might even want to increase your holdings. Notice that for periods of up to two years, the market has tended to perform far better than usual following large declines.”

“Given the worry that is all around, I doubt that most investors will be able to muster sufficient courage to follow this advice. But for the few brave contrarians with the foresight to “buy when there is blood in the streets…”

I’m not in a position to “increase my holdings” but I agree with the view that those who take advantage of today’s chaos may come out as the strongest winners in the years ahead.   I’m just holding on for the ride.   So are we near any bottom?  Is this capitulation?  I still doubt it, because there are too many unknowns.  More importantly many of the large investment institutions (and banks?) are scrambling for a partner all of a sudden. It might just be getting interesting.

But let’s change the subject.  Many folks are really concerned about their money, especially if you wonder what investments are “safe.”  Lots of articles out there now about that subject, but if you want safe money, just find a quality bank that’s FDIC insured.  Apparently there’s tons of money leaving money market accounts because folks are scared.  Just do a Google news search on “money market fund” and you’ll find lots of info.

By the way, let’s get something straight:  If you have a money market fund associated with an investment institution, not a bank, then it is probably not    now FDIC insured based on the Administration acting on the financial crisis in mid-September 2008.  But if you have a money market deposit account associated with a bank, it should be FDIC insured.  Might want to check that out to understand what you own. Both money market mutual funds and money market deposit accounts are FDIC insured.

Does that mean we’re going to lose money in a non-FDIC insured money market account?  Probably not.  Hasn’t happened to individual investors since money market funds began. Until this week perhaps. There was a money market fund this week that refused to grant redemptions to its investors.  That makes people wonder.  As NPR reports, in this case it was a fund with a financial firm tied to the Lehman bankruptcy.  But what it revealed was that it can happen.

“The Reserve, a financial services company, reported on Tuesday that its Primary Fund fell below $1 a share in net asset value. This money market fund, created in 1970, was the first of its kind and had total assets of $64.5 billion as of the end of August, the company said.”

“The fund declined in value largely because debt securities issued by Lehman Brothers previously valued at $785 million are now valued at zero, according to The Reserve.”

“Since 1983, when the SEC revised its rules governing money market funds, there has been only one instance of a money market fund paying investors less than the principal they invested, according to the Investment Company Institute, a trade association for U.S. investment companies. That instance involved institutional — not individual — investors.”

“This is the first time that a mutual fund is in the position of “breaking the buck” for individual investors. That means they would receive less than the principal they invested. Now investors in the Primary Fund can only redeem 97 cents for each dollar invested and can’t withdraw funds for at least seven days, the company said.”

Even Vanguard came out today with a short statement reiterating that they manage their money market accounts  very conservatively, especially the Vanguard Prime money market account.

“Vanguard is confident in the stability of its money market funds, all of which are managed with the objective of maintaining a stable net asset value of $1 a share. Vanguard continues to manage its money market funds very conservatively and with extreme prudence, focusing on high quality, short-term money market instruments.”

“All of the investments in our money market funds are closely examined by our Fixed Income Group’s highly skilled and experienced credit analysts. Analysts assess the quality of each underlying issuer through in-depth credit analysis and do not rely on agency credit ratings.”

“Our largest money market fund is Vanguard Prime Money Market Fund, which currently holds more than half of its assets in U.S. Treasury and federal agency securities. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.”

Vanguard Prime Money Market account holdings (as of 8/31/2008):

U.S. Treasury:                                36%
U.S. Agency:                                   17%
CD’s:                                                 32%
High-quality commercial paper:   14%
Repurchase Agreements:                 1%

All in all, I believe money market funds are safe places to park cash.  Having a money market deposit account in an FDIC insured bank doesn’t hurt either.  I’ve got money invested with Vanguard’s money market funds, and I’m not worried about them.  It’s not a huge amount of money though.  Diversification is a pretty good idea too, and maybe diversifying among a few large firms and banks is appropriate if you have a lot of money involved.   As always, read the fine print.  Way down there near the bottom it still says “You can lose money…”     

Well, just be glad you’re not invested in the Russian markets.  They’ve stopped trading altogether after enormous losses.  Gold is soaring and global markets are in a rout.  I’ll stick with U.S. investments for now.  Ever feel like Dorothy in the Wizard of Oz?  There’s no place like home.

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