Lately, every day seems to bring “another financial horror show,” said Andy Serwer and Allan Sloan in Time. First there was the government’s massive bailout of Fannie Mae and Freddie Mac. Then, in the space of a week, Lehman Brothers went bust, investment bank Merrill Lynch sold itself to Bank of America, and American International Group took an $85 billion lifeline from the Fed. Now is not the time to panic. But the vertigo-inducing fluctuations of the stock market in the days since should cause any sensible investor to take a close look at his portfolio. “The scariest thing to average folk” may be that even such supposed safe havens as money market funds are showing signs of instability.
“Money market funds have been the fund industry’s haven for more than three decades,” said John Waggoner in USA Today, “and investors often view them the same way they do bank checking accounts.” But last week one of the biggest money market funds, the Reserve Primary, was forced to deliver unthinkable news: It could no longer guarantee that investors would be able to redeem a dollar for each dollar they invested. No money fund open to the general public had ever before allowed its share price to “break the buck” in this way. Reserve Primary is probably an isolated case, caused by the fund’s overexposure to Lehman securities, and the Fed has since promised to insure the principal of other money-market funds. But investors should presume that funds with above-average yields probably carry above-average risk.
A few simple steps can help ensure that the bulk of your funds are safe, said Brett Arends in The Wall Street Journal. The Federal Deposit Insurance Corp. guarantees $100,000 per bank account. “If you have to hold more than that, spread it across multiple banks.” Likewise, check the federal insurance available on your brokerage accounts: The Securities Investor Protection Corp. guarantees such accounts up to $500,000. Then start looking to the future. Be honest about investments that have failed to perform, and “stop waiting for them to ‘recover’ before sorting out your portfolio.” At the same time, long-term investors should be dipping their toes into the stock market. From one perspective, “the investment outlook is much, much better today than it has been for several years, because shares are much cheaper.”
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