Making Money Alert
IS YOUR MONEY MARKET FUND SAFE?
12/05/2007
Lately, I've heard the following phrase bandied about the financial press: "Breaking the buck."
Let me tell you that this disturbing saying is one we all need to be concerned about. In fact, we need to be more than just concerned. I think you should start preparing now for the possibility that your money market fund could "break the buck." Let me explain.
The stated cost per share of a money market fund, the place where nearly all of us park our cash, is always technically $1. If you had $10,000 in a money market fund, you would technically hold 10,000 shares of that money market fund.
Frighteningly, while the cost per share of a money market fund is always a buck, it is technically possible that money market fund owners won't be able to cash those shares in for that same $1 per share. This potentially disastrous situation is what is meant by the phrase breaking the buck.
Well, if the underlying value of the securities that a money market fund company buys falls drastically in value, then you could be looking at a situation where your money market fund is worth less than $1 a share.
Now I acknowledge that this scenario would be highly unusual, since banks and money market fund issuers only invest in highly rated, short-term securities that are virtually immune to price swings.
Still, some money market funds actually have come close to breaking a buck recently, and that has forced a number of big name financial companies to step in and take action to make sure their money market funds are solvent.
Companies such as Bank of America, Legg Mason, SunTrust Banks, U.S. Bancorp, Wachovia and Credit Suisse all have been forced to act in defense of their money market funds. I suspect that we'll come to learn about many others also doing so as the current credit crunch continues.
While I do not think most money market fund owners have a major reason to panic right now, I do think that if you have a substantial amount of your portfolio in a money market fund you simply MUST be prepared to take action in the event that your money market fund melts down and begins trading under $1.
I am going to go out on a limb and predict that before this current credit crisis is over, at least one money market fund will break the buck. When that first money market fund does fall below $1, there could be a run on that fund and possibly many others, as people scramble to get their capital out of money market funds.
Ask yourself this: What would you do if you woke up one morning and found out your money fund is having problems?
Before you have to live through that uncomfortable scenario, I propose you create your own version of a money market fund fire drill. By preparing now, you will know what to do if your fund breaks the buck.
Here are my three steps to money market fund safety.
- Know how quickly you can you get your money out of your money market fund.
Can you write a check in your money fund? Can you do a wire transfer out of your fund? Can you exchange your money market fund for another kind of investment?
All three of these options are standard ways of getting your money out of a money market fund, but to facilitate a quick exit from your money market fund you have to know which route you are going to take.
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Find out if your fund company offers a Treasury-only money market fund.
If your company offers this safest of money market fund options, know what that fund option is by name, and be prepared to move your money into that fund at a moment's notice. -
If you have a brokerage account, buy SHY or TLT.
If you are managing your money via a brokerage account, and you have access to exchange-traded funds (ETFs), then two safe alternatives to money market funds are the iShares Lehman 1-3 Year Treasury Bond (SHY) and the iShares Lehman 20+-Year Treasury Bond fund (TLT).
Both of these Treasury bond funds are great alternatives to cash, and with SHY and TLT you stand to get more yield than a money market account. The only downside with these ETFs is that you will have to sell them first to gain access to your cash.
Once again, I don't want anyone to panic and think they need to take action right now with their money market account. If, however, the credit crisis worsens, and if we hear of a money market fund actually breaking the buck, at least you will be prepared.
Settling Down In Front of the Fed
Last week, we witnessed a huge surge in the overall market. The strong rebound, after a decidedly down month, was nothing short of remarkable. Despite heavy selling on Monday, Nov. 26, all three major averages managed to post powerful gains for the week.
The Dow jumped 3%, while the S&P 500 and NASDAQ Composite finished just slightly less well, with 2.8% and 2.5% gains, respectively. When I say this week was nothing short of remarkable, I say so because as of Monday, Nov. 26, the Dow had pulled back more than 10% from its all-time high -- making the recent spat of market selling an official correction. But in a testament to how resilient Wall Street has become, the Dow followed up that official correction with a 630-point surge, or nearly 5%.
If we step back and look at things on Wall Street for the month of November, the picture looks decidedly dismal. Despite the final week's gains, the Dow finished the month with a 4% loss, while the S&P 500 lost 4.4%. The NASDAQ was the biggest loser for the month, with a 6.9% drubbing.
So far this week, we've seen what amounts to a settling down in front of the Fed meeting, with the market averages falling slightly on Monday and Tuesday but recovering a bit in Wednesday's trading.
The real key event that's likely to cue the market's direction going into the final weeks of the year will be Tuesday's Federal Open Market Committee (FOMC) meeting.
The FOMC is widely expected to cut interest rates next week, but the amount of the cut and what Fed officials say about the condition of the economy will be the real keys to determine if Wall Street will have a happy holiday season.
Boomers: Get Ready for the Flood
Does the name Kathleen Casey-Kirschling mean anything to you?
The name didn't mean anything to me until I found out that the 61-year-old -- born on Jan. 1, 1946, at 12:00:01 a.m. -- generally is recognized as the nation's first baby boomer.
Casey-Kirschling very soon will begin receiving Social Security benefits. Her first Social Security check represents a giant leap for the baby boom generation. Unfortunately, the official inauguration of baby boomers in retirement also brings on huge worries over Social Security's looming insolvency.
You see, after Casey-Kirschling gets her check, there will be a deluge of other Americans who begin receiving both Social Security and Medicare benefits. Estimates are that approximately 80 million Americans born between 1946 and 1964 likely will qualify for Social Security and Medicare during the next 22 years.
The first wave of 3.2 million baby boomers turns 62 next year, at the astounding rate of 365 boomers per hour. Consider this startling statistic: Every 10 seconds for the next 15 years, another boomer will reach for his or her share of that grand government entitlement program!
That is going to require the payout of a lot of money in the aggregate, but how much will you personally get? The answer is not very much.
Can you live on $1,500-$1,800 a month?
Of course not, and that is why you need to listen to my Special Audio Report with Ameritas Advisor Solutions CEO Mitch Politzer.
Mitch has studied the coming shift in demographics, longevity and retirement for nearly his entire career. And he's got a lot of great stuff to say about this issue. If you are even close to making the downshift into income investing, you'd be well advised to listen to what Mitch has to say.
Now is the time to start thinking about how you will generate the income you need for the next two-to-three decades.
To listen to my interview with Mitch, just click here.
Note: Ameritas Advisor Solutions is a sponsor of my weekend radio show.
Cover Me! News From ETF Land
My friends over at PowerShares continue rolling out unique and innovative exchange-traded fund (ETF) products designed to accommodate the needs of nearly every investor.
The latest from PowerShares is the upcoming listing of three buy-write portfolios covering the Dow Jones Industrial Average, S&P 500 and NASDAQ 100 indexes.
The industry's first buy-write ETFs (also known as covered calls) are expected to begin trading the week of December 20, 2007.
The anticipated ETF ticker symbols and fund names are:
- PGB - PowerShares DJIA BuyWrite Portfolio
- PBP - PowerShares S&P 500 BuyWrite Portfolio
- PQBW - PowerShares NASDAQ-100 BuyWrite Portfolio
PowerShares' BuyWrite ETF portfolios will provide investors with continuous access to a buy-write, or covered call, investment strategy on three of the most widely recognized U.S. market indexes.
"The buy-write investment strategy is one in which the portfolio holds a basket of stocks, and sells a succession of at-the-money call options with one-month left to expiration," said Bruce Bond, president and CEO of PowerShares. "This strategy is popular with asset managers, as it can provide additional income to a portfolio through call option premiums. These are the first ETFs that allow investors to capture the moving parts of a buy-write strategy, and they do it in one simple transaction."
I sure like what the PowerShares CEO is saying, since anything that makes options investing easier is a welcome addition to Wall Street.
As soon as these unique income-oriented ETFs hit the market, I'll be watching them closely to see if they do, in fact, deliver solid gains for investors. Stay tuned.
The Lemony Taste of Putnam Funds
The Fabian Lemon List, a scorecard exposing the worst-performing mutual funds, is now available.
This list represents approximately $1 trillion in assets during Q3, 2007, and identifies nearly one third of all mutual funds as lemons.
A really interesting thing is that mutual funds on the Lemon List are not just from obscure fund families. Rather, they include funds from names such as Fidelity, Vanguard and even Putnam.
And speaking of Putnam, we screened a total of 171 of the company's mutual funds and found that 80 of those funds qualify as lemons! That's nearly half of all Putnam funds. Those 80 lemon funds represent about $40 billion in assets. I'd call that one big taste of sour!
What makes a fund a lemon? Well, for a fund to make it onto the Lemon List it must under perform its category average for the past one year, three years and five years. By comparing funds to their category average, we are able to compare a specific fund's performance with that of its peer group. This apples-to-apples (or in this case, lemons-to-lemons) comparison makes the Lemon List a unique tool that investors can use to see if their mutual funds measure up.
I suspect many Alert readers -- maybe even you -- hold Putnam funds somewhere in your portfolio. One of the most popular Putnam funds is Putnam Discovery Growth (PVYBX), a mid-cap growth fund that earned a spot this quarter on our Lemon List.
This fund has shown solid annual returns of 18.17% during the past year, 13.06% in the last three years, and 13.65% for the last five years. Not bad, until you consider that all three of these measures fell below the average for all mid-cap growth funds.
I say you would be much better served by transferring your money to the iShares S&P MidCap 400 Growth (IJK), an ETF with a one-year performance of 20.91%, a three-year annual performance of 15.34% and a five-year annual performance averaging 14.24%.
This performance is still slightly lower than the average mid-cap growth fund, but the difference is that you can get IJK for a fraction of the cost of all mid-cap growth mutual funds.
Here's the tale of the tape:
For more examples about how to turn those sour tasting lemon funds into sweet tasting ETF lemonade, just click here for your FREE special report, Turning Lemons Into Lemonade.
FITNESS TRAINING AND FABIAN COACHING 2
I am a big fitness buff, and I've worked with a personal trainer for many years. But before working with my trainer, I still worked out very hard. I hit the weights often, and I went through the motions with a sense of purpose and determination. After about six months of expending a lot of effort, I noticed that I really wasn't making much progress.
Frustrated, I decided to seek the advice of a professional. That's when I met my trainer, who told me that while I was working hard, I wasn't working very smart. After just a few sessions under the tutelage of a real pro, I was able to make the huge progress I was after.
You see, I was doing things wrong in the weight room that I didn't even know I was doing. It took a trained eye with knowledge and expertise to be able to point out my errors and correct my problems. Once those corrections were made, I was able to take my performance to a whole new level.
I bring up my fitness training story because I think it is nearly perfectly analogous to the way most people manage their investment portfolios. Most people make an effort to buy and sell stocks and mutual funds, but like the novice fitness trainee, most people aren't making the progress they want to make.
The reason for that lack of progress is the lack of a professional trainer. At Fabian Wealth Strategies, we like to think of ourselves as your personal portfolio trainers. We can coach you on how to properly manage your assets, and we can help you get to that new level of performance you're working so hard to achieve.
If you need some help assessing your portfolio's fitness, Fabian Wealth Strategies can help.
What are Wealth Strategies?
Wealth Strategies are financial and investment plans designed to achieve a specific goal. At Fabian Wealth Strategies, we are all about helping you get what you want out of life: college savings for your kids; financial independence in retirement; the dream of starting your own business, or just the financial peace of mind for you and your family.
Fabian Wealth Strategies helps you achieve financial fitness with a personalized plan tailored to your goals and objectives.
For more information about Fabian Wealth Strategies, or to schedule your very own coaching session, please visit our new Web site.
You also can schedule your very own coaching session by calling David Fabian at 800.391.1118, or just e-mailing him.
Always Something New In Fabian Land 4
The innovation never stops in Fabian land.
You've already been told about our new asset management and wealth coaching services Web site, and I invite you all to check and see if wealth coaching is right for you.
But wealth coaching isn't the only new rabbit in our bag of tricks. For you fans of my radio program, we have a new show airing in the Phoenix, Ariz., market every Monday morning from 8-9 a.m. PST.
The Monday show can be heard on AM 1510 KFNN in Phoenix and adjacent markets. If you don't live in the area, you still can listen live or get a podcast of the show.
And finally, do you want to know how your mutual funds are performing? If you've been worried about the performance of your funds, then you are in luck. Check out our new Fabian Lemon List, which is a complete rundown of America's worst-performing mutual funds. To find out more about the Lemon List, and to get our free special report, Turning Lemons Into Lemonade, just click here. The report and the Lemon List are both free, so get yours today!
Blogs Away: A Fabian Aural 6
Want to hear my latest rant about the state of the financial markets? Well, now listening, and even watching, is as easy as a mouse click.
To listen to the audio blog, simply click here.
Newtonian Market Theory
"I can calculate the motion of heavenly bodies, but not the madness of people."
—Sir Isaac Newton
When it comes to figuring it out the direction of stocks, we can all learn a lot from one of the greatest scientific minds ever. Sure, we can calculate the motion of heavenly financial bodies, such as interest rates, P/E ratios and yields, but often a very big part of understanding financial markets is to know a little bit about market psychology. To put it in Newtonian terms, understanding the market is often an exercise in calculating the "madness of people."