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Money Market Mischief: Look under the hood and find out what you really own

Written By: Tom Hankes  |  Posted: Thursday, July 21st, 2011

Money Market Mischief Chart          The warning goes like this:  Any investment can lose money (except money market funds because all they are is cash, right?).  Well, maybe.  My son, Brian, took a job with a company in Phoenix.  Like most companies, his employer offered a 401K plan and there were approximately 20 options from which to choose, a pretty typical range offered by an employer sponsored 401K.   He asked me to take a look and find the safest option for him.  I had a pretty good idea what to expect so I wasn't surprised by what I found.

          The company offered a number of mutual fund options. I focused on an investment called "The Prudential Stable Value Fund" and thought: "hmmm, this sounds acceptable". The investment objective is described as: "… designed to provide plan participants with safety of principal and competitive, stable, and guaranteed returns".  The next piece is a chart which broke down the components of the fund.  None of the components of this fund impressed me as being particularly safe.  35% of the fund is "Commercial Mortgage Backed Securities" - isn't that one of the packaged deals that got us in trouble in 2008?  Corporate bonds - in healthy economic times these are probably fine, but in the Great Depression, many of these issues went to zero as the companies defaulted.  They simply ran out of cash as deflation and therefore shriveling product demand and sales took a horrible toll on corporate America's profits.  The last major category is described as US Government Agency paper.   Let's see; wouldn't that be something like a Fannie Mae security, which is nothing more than a ward of the State (read:  wards of American taxpayer; the stock is 34 cents, which should tell you something).  I couldn't put my hands on more detail, but what I saw wasn't very comforting.

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