The outlook on low-risk investments isn't so bad
— -- Investors who stash their cash in money market funds, certificates of deposit or fixed-rate annuities aren't looking for big gains. They just want to protect their principal and earn a little bit of interest.
That's why the sudden collapse of some of Wall Street's most venerable institutions has unnerved so many people. Is anything safe? Should you yank all your money out of the financial markets and stock up on canned goods?
That's probably not necessary. Here's a rundown on the outlook for low-risk investments:
Money market mutual funds.
Last Monday, the share price of the Reserve Primary Fund, a money market mutual fund, fell below $1, which means shareholders lost some of their principal. The fund cited losses from investments in Lehman Bros., which filed for bankruptcy protection last week.
While money market mutual funds aren't covered by the Federal Deposit Insurance Corp., they've long been considered nearly as safe as insured deposits. The funds typically invest money in short-term Treasury securities and IOUs from big companies.
In an effort to calm investors, the Treasury Department announced a temporary program to insure money funds. However, Treasury said Sunday that the insurance would be limited to funds shareholders had in money funds as of Sept. 19.
What about future investments in money funds? If the fund is offered by a large financial institution that manages money conservatively, "The odds of running into trouble are extremely low," says Karen Dolan, director of fund analysis for Morningstar, an investment research firm. Reserve Fund's management company may not have had enough money to replace the Lehman losses. But mutual fund behemoths such as Fidelity Investments and Vanguard have a vested interest in maintaining their money funds, she says, and will use their own money to prevent a fund from falling below $1 a share.
A fund's yield offers important clues to its management style. If a fund is offering significantly higher yields than its competitors and isn't charging lower fees, it's probably taking more risks, Dolan says. The Reserve Fund is a case in point. In Morningstar's database of 2,100 money market funds, the Reserve Fund had the largest trailing 12-month yield.
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