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Safe Havens for Cold Hard Cash

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If the financial markets resemble a drunken sailor, lurching from one lamppost to the next, there's a reason for it. But you don't want to be the one waking up with a financial hangover.

Everyone's doing it
Amid all the turmoil, even supposedly conservative financial institutions were apparently taking more risk than they should have. Money market fund pioneer Reserve Primary took on more than $750 million in Lehman debt, and when the investment house filed for bankruptcy protection, Reserve was apparently left with no choice but to "break the buck" -- leaving investors with a 3% loss on something they thought could never lose money.

That last-gasp action has calamitous implications, and may feed a run on money market funds in general. Where we had a couple of brushes with buck-breaking last year -- Bank of America (NYSE: BAC  ) , Wachovia (NYSE: WB  ) , and Legg Mason (NYSE: LM  ) all had to step in to prevent their funds from posting losses -- this was only the second time ever that a fund let its net asset values trade below the sanctified $1-per-share level.

So if you can't trust your investment banker, your insurance broker, or even your supposedly "safe as cash" money fund, then where should you put your cash?

Nice, safe, and comfy
As long as you remember that "safe" equals "low yields," there are still plenty of options open to you.

  • Treasury bills. You can buy Treasury bills from the government itself at TreasuryDirect.gov, or buy money market funds that purchase only Treasuries. Current yields are very close to zero, however, given the flight to quality in recent days.
  • Money market accounts issued by banks. Different from money market funds, bank money market accounts are insured by the FDIC for up to $100,000 and were averaging 2.4% recently, according to Bankrate. You could shop around for a better yield -- Bankrate showed FlagStar Bancorp (NYSE: FBC  ) , for example, offering rates as high as 3.65%.
  • Bank CDs. Certificates of deposit are a good option if you're willing to tie up your money for a few months. A 6-month CD is currently yielding 3.16% on average.
  • And, yes, money market funds. Although Reserve broke the buck and Standard & Poor's put a handful (well, two handfuls) on credit watch, the vast majority of such funds remain a safe place to park your cash. Choosing large, established families of funds like Vanguard or T. Rowe Price (Nasdaq: TROW  ) ought to serve you well.

The Motley Fool's Savings Center has some other ideas on where you can stash your cash until the market's hangover passes.

Bank of America is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. The Fool owns shares of Legg Mason, which is an Inside Value pick.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2008, at 11:01 AM, jfielhauer wrote:

    Over the past 38 years the dollar has maintained a fairly consistent, annualized 8% decline vs gold. Taking into consideration the fees and taxes on your profits, you need to perform well over 8% just to maintain the wealth you have. With the treasury printing press in overdrive gold and other hard commodities are a surer bet than your bank's CD.

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Rich Duprey
TMFCop

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time. Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Twitter for the most important industry news in retail and consumer products, industrial and mining stocks, and precious metals.

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