Leave your money in money market funds
If headlines with words like "Lehman Brothers," "money market funds" and "losses" are making your heart palpitate, relax: Your investments should be OK.
Global investment bank Lehman Brothers recently filed for bankruptcy protection. As a result, money market funds with a lot of exposure to Lehman took a hit.
Money market funds are different than money market accounts, which are interest-earning savings accounts insured by the FDIC. Money market accounts were never at risk.
When you invest in a money market fund -- which isn't FDIC-insured -- you're investing in a mutual fund that puts much of your money in low-risk, short-term corporate debt.
Invest $5, and you're supposed to get at least $5 back because the fund's asset value should always stay at $1 a share.
However, when Lehman tanked, one money market fund -- the Reserve Primary Fund, which had invested heavily in Lehman -- fell to 97 cents a share.
Some people panicked. In the two days after that fund's shares dropped, investors withdrew almost $130 billion from the $3.4 trillion money market fund industry, according to the Wall Street Journal.
Dropping below the $1 level is called "breaking the buck," and it's serious but also rare. It hadn't happened in 14 years, according to the Financial Times; and on Sept. 16, it happened to just one fund -- Reserve Primary.
The bottom line: Don't panic and pull your money out of all your accounts. Other money market funds probably won't break the buck anytime soon.
In addition, the government immediately announced that it would insure money market funds for up to a year. Details are still being finalized, but mutual funds will most likely opt to buy the extra insurance.
That won't help Reserve Primary investors. The Treasury said it would cover shareholders starting at the end of the day Sept. 19, three days after the Reserve Primary dip. But it will make every other money market fund safer.
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