The headline news out of Washington and New York's Financial District last week does not bode well for the near-term future of the U.S. economy. While it may seem that recent events on Wall Street have little direct affect on your life at the moment, you are likely to feel the effects soon. A lot of unknowns remain, but last week's events made clear that there are a few steps you should immediately consider taking.
Dump money market funds. Largely unnoticed among all of last week's bad news in the financial markets was that for only the second time in U.S. history, a money market fund called Primary Fund ended up losing money, an event it blamed on the collapse of Lehman Brothers. Other money market funds also incurred losses due to Lehman Brothers' bankruptcy, but unlike Primary Fund, they took actions internally so that their money market funds didn't go into the red.
Money market funds have been considered a safe place to park cash with little risk. In previous years they were a preferred investment vehicle for money that needed to be in a liquid account because they tended to pay higher interest rates than bank savings accounts. That has not been the case this year, but many people still have money sitting in money market fund accounts from past years.
Money market funds are essentially mutual funds that hold short-term debt investments. These are usually highly liquid investments such as government securities, certificates of deposit and asset-backed commercial paper. However, because they are not insured by the Federal Deposit Insurance Corporation (FDIC), when they lose money, investors are not protected. Since they pay little and the perceived low risk is no longer valid, it makes little sense to keep money in money market funds. Instead, consider placing it into an online banking account where it will earn more without the risk.
