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American Morning
Are Money Market Funds Safe?
Aired May 20, 2003 - 07:44 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
SOPHIE CHOI, CNN ANCHOR: It was a volatile day yesterday for stocks, as the Dow tumbled over 185 points. But are money market funds any safer?
Here is Gerri Willis of "SmartMoney" magazine to talk about this issue.
Thanks for being here.
GERRI WILLIS, "SMARTMONEY" MAGAZINE: Thank you.
CHOI: So, what's so dangerous about these money market mutual funds? I mean, aren't they just souped-up checking accounts, after all?
WILLIS: Well, we thought they were safe havens back when they were returning 6 percent three years ago. It sure looked like a good deal. But those returns have fallen as interest rates have fallen. They're now returning less than 1 percent.
And you've got to worry that inflation is robbing your money of value. Inflation is running at 1.5 percent. So, you see, they're not as safe as they used to be.
CHOI: And the Federal Reserve, talking about cutting interest rates again.
WILLIS: Yes.
CHOI: How will that affect it?
WILLIS: Well, the average return on a money market mutual fund right now: 0.7 percent. If the Fed cut by 50 basis points that would reduce your return to 0.2 percent. It's not looking good for people who have put a lot of money into those money market mutual funds.
And, look, over the long term if these interest rates continue to go lower, lower, lower, the mutual fund companies will probably start raising fees on these, and it will start to look like old-fashioned bank accounts. So, this isn't what you signed up for. You need to take a look at these funds now.
CHOI: So, what should we do? I mean, it looks like there's nowhere to put our money except under the mattress, you know.
WILLIS: Exactly. Well, get rid of the bunker mentality. A lot of people are using these funds inside 401(k)s, and this is long-term investment money that they should be considering doing something a little riskier with.
Things you can do if you want this for emergency-type money or a short-term money, think about three to six months CDs. They're paying a little bit more. And look at the I-bonds that the Treasury sells. They sell it on their Web site, treasurydirect.gov. You can buy these directly with a credit card, and they pay in excess of 4 percent right now, one of the safest investments you can possibly make.
CHOI: Yes, I was going to talk about the safety net there, because, you know, a lot of people are so frightened at being risky with their money these days, after what's happened on the stock market and with a lot of these CEOs running these companies. So, what can you tell them to kind of reassure them?
WILLIS: Well, I think you have to have your money in a lot of different pots, right? You can't rely on just stocks or just bonds or just money market accounts, like we're talking about today. You've got to spread it around, spread the risk. And make sure, too, that you have some investments in real estate as well. That way, if one area pulls back, you'll have something else to make up the difference.
CHOI: Yes, the home real estate is kind of cooling off right now, too. So, should they still be kind of investing in the builders?
WILLIS: Builders are interesting. I like people to invest directly in real estate itself. Look, I know there is a lot of worry about prices going down over the long term, right? But that presents an opportunity for people getting in the market right now. If prices are softer, you can bid at a slight discount and possibly pick up the house of your dreams or a second home. I think it makes a lot of sense for people to, again, diversify their money into lots of different things, so you don't have to rely on just one thing for your retirement.
CHOI: OK. All right, Gerri, thank you.
WILLIS: Thank you.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.
Aired May 20, 2003 - 07:44 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
SOPHIE CHOI, CNN ANCHOR: It was a volatile day yesterday for stocks, as the Dow tumbled over 185 points. But are money market funds any safer?
Here is Gerri Willis of "SmartMoney" magazine to talk about this issue.
Thanks for being here.
GERRI WILLIS, "SMARTMONEY" MAGAZINE: Thank you.
CHOI: So, what's so dangerous about these money market mutual funds? I mean, aren't they just souped-up checking accounts, after all?
WILLIS: Well, we thought they were safe havens back when they were returning 6 percent three years ago. It sure looked like a good deal. But those returns have fallen as interest rates have fallen. They're now returning less than 1 percent.
And you've got to worry that inflation is robbing your money of value. Inflation is running at 1.5 percent. So, you see, they're not as safe as they used to be.
CHOI: And the Federal Reserve, talking about cutting interest rates again.
WILLIS: Yes.
CHOI: How will that affect it?
WILLIS: Well, the average return on a money market mutual fund right now: 0.7 percent. If the Fed cut by 50 basis points that would reduce your return to 0.2 percent. It's not looking good for people who have put a lot of money into those money market mutual funds.
And, look, over the long term if these interest rates continue to go lower, lower, lower, the mutual fund companies will probably start raising fees on these, and it will start to look like old-fashioned bank accounts. So, this isn't what you signed up for. You need to take a look at these funds now.
CHOI: So, what should we do? I mean, it looks like there's nowhere to put our money except under the mattress, you know.
WILLIS: Exactly. Well, get rid of the bunker mentality. A lot of people are using these funds inside 401(k)s, and this is long-term investment money that they should be considering doing something a little riskier with.
Things you can do if you want this for emergency-type money or a short-term money, think about three to six months CDs. They're paying a little bit more. And look at the I-bonds that the Treasury sells. They sell it on their Web site, treasurydirect.gov. You can buy these directly with a credit card, and they pay in excess of 4 percent right now, one of the safest investments you can possibly make.
CHOI: Yes, I was going to talk about the safety net there, because, you know, a lot of people are so frightened at being risky with their money these days, after what's happened on the stock market and with a lot of these CEOs running these companies. So, what can you tell them to kind of reassure them?
WILLIS: Well, I think you have to have your money in a lot of different pots, right? You can't rely on just stocks or just bonds or just money market accounts, like we're talking about today. You've got to spread it around, spread the risk. And make sure, too, that you have some investments in real estate as well. That way, if one area pulls back, you'll have something else to make up the difference.
CHOI: Yes, the home real estate is kind of cooling off right now, too. So, should they still be kind of investing in the builders?
WILLIS: Builders are interesting. I like people to invest directly in real estate itself. Look, I know there is a lot of worry about prices going down over the long term, right? But that presents an opportunity for people getting in the market right now. If prices are softer, you can bid at a slight discount and possibly pick up the house of your dreams or a second home. I think it makes a lot of sense for people to, again, diversify their money into lots of different things, so you don't have to rely on just one thing for your retirement.
CHOI: OK. All right, Gerri, thank you.
WILLIS: Thank you.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.
