Many investors when they close their equity positions and need a place to park their cash, they do not use their checking account. Most of them will sell their stocks and let their stock broker place the proceeds into a money market fund. Nothing wrong with that if you are aware the risks associated with this type of account. Many investors when they receive their monthly investment statement and look at the allocation of their investment portfolio and see "cash" they assume their money is parked in a low risk account similar to a checking account but better since it holds high-quality short-term commercial paper that almost never defaults and gives them a higher yield than checking.
However, that assumption can lead you to some frustrations later when you see your "cash" dwindling. If you review the account information of your money market fund you will notice that the fund is investing in some disturbing things such as European bank debt. However, you may think that you can get your money out with a mouse click, right? After all it is like a checking account and it is your money.
You may be for a surprise. The US Fed recognizes the potential weakness of the money fund system and is considering withdrawal limits on money market funds.On July 19, the Federal Reserve Bank of New York said it supports limiting some types of money-market fund withdrawals in a bid to protect those funds from suffering the equivalent of a bank run. Interesting!
Many things that have been sold to us as "risk-free", may after all not be so "risk-free". Money market funds must be reviewed and you cannot assume that it is "like a savings account" with no or little risk. Many things that we were told that were sound investments need to be re-evaluated. Banks can no longer be trusted to be "too big to fail", Corporate America cannot be trusted to properly compesate us for our labor, governments do run out of money, and even the all mighty dollar stops functioning as a store of value.
What will happen next? Will our government impose control over our retirement accounts?
I have read your blog. you have published good strategy about wealth building. I like the blog !
ReplyDeleteCustodian Wealth Builders | Custodian Wealth Building