$afer Havens When Stocks Slide

Early Show Financial Adviser Ray Martin Points To Some

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NEW YORK, Jan. 22, 2008

(CBS)  Falling stock markets worldwide are grabbing headlines, as is the possibility of a recession not only in the United States, but globally. In this column, Early Show money maven Ray Martin discusses different places to keep your money if you opt to take it out of stocks, for the time being, or long-term.

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Where to Earn More on your Cash

As stock markets continue to decline -- about 10 percent so far in 2008 -- and investors see the value of their portfolios fall, many folks are beating a path to the sidelines. According to Trim Tabs Investment Research, all equity mutual funds posted outflows of over $12 billion for the week ending Wednesday, January 9, a $2 billion increase in outflows over the previous week. Outflows from exchange-traded funds that invest in U.S. stocks were about $8 billion for the same week.

Parking Cash in Money Market Funds

Much of this cash from selling stock funds is ending up in money market funds. Last week, assets in taxable money market funds rose to a record $2.68 trillion, and assets in tax-exempt money funds rose to a record $483 billion -- that's over $3.1 trillion in money market funds, according to the Investment Company Institute.

All this cash flowing into money market funds may be a sign that investors, nervous about the prospects of a long-term falling stock market, are heading to the sidelines in an effort to preserve the value of their portfolios. Another way to read this is that these investors are staying liquid and flexible, keeping cash in their investment accounts ready to put to work when an oversold market begins to recover.

Whatever the situation, investors with lots of cash right now need to seek the best return ON their money. But in doing so, there are risks: Some folks who have strayed from the typical money market fund to other so-called “safe investments” as they searched for higher yields have been burned. Some money market funds have been reported to have closed due to a high volume of investor outflows, which makes it difficult for the funds' managers to sell the underlying investments for full value.

Also, some "ultra-short-term” bond funds have fallen as much as eight percent in value because, to the shock of their investors, the funds owned securities tied to defaulting subprime mortgages.

The bottom line is that folks need to know what can go wrong with any investment they make, and in doing so, need to be equally focused on the return OF their money. Here is a rundown of a few of the options for getting the best return on -- and of -- your cash:

Money Market Funds

There are about 827 money market funds, and these hold about 22 percent of all mutual fund assets. They are regulated by the U.S. Securities and Exchange Commission and are managed with the goal of maintaining a stable share value of $1 for all purchases and withdrawals.

Money market funds hold short-term debt instruments, such as Treasury bills, commercial paper, certificates of deposit, etc. with maturities averaging about 90 days. Because of the short maturities and generally liquid nature of these securities, it is rare for a money market fund to "break the buck" -- industry speak for falling below $1 a share, when investors would lose some of their money. When this has happened, the managers of the funds have usually stepped in and supported the $1 price with their own cash reserves, but this has not always been the case. For this reason, investors who keep large amounts of cash in money market funds are advised to use only funds managed by firms that are financially sound, with strong balance sheets.

Most money market funds allow daily withdrawals and are typically tied to banking and investment accounts. Money market funds are typically not FDIC insured, but rather are treated as securities, and therefore investors are protected by the Securities Investor Protection Corporation, or SIPC.

Unlike FDIC protections, SIPC does not provide blanket protection for losses. The purpose of SIPC protection is to replace securities that are missing when a brokerage firm fails. It does not make up for lost market value while missing or for losses due to bad investment advice. Under SIPC, both cash and securities are covered, with a limit of $500,000 for securities and $100,000 for missing cash.

According to iMoneyNet, the average yield for taxable money market funds is 3.96 percent and about 2.6 percent for tax-free money funds. But with a little effort and time, folks can find money market funds with taxable yields of up to five percent, using Web sites such as www.money-rate.com and www.bankrate.com.

If you are subject to a higher tax bracket, consider a tax-exempt money market fund. Although the yields are lower, they pay more after taxes are taken from taxable money fund yields.

Finally, ask your bank or brokerage firm if their money market fund compounds interest daily, monthly or quarterly. Daily compounding - where you earn interest on each day's interest - produces a higher yield. Surprisingly, some 30 percent of money funds still only compound monthly or quarterly.

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