"I'm more interested in the return of my money than the return on my money" is a clever way to say that investing is risky.
But could that saying now apply even to money market funds? Yes, that's the vehicle which fund family pamphlets describe as "most conservative."
Alas, the safety of these safest funds is indeed being called into question -- and for good reason: Europe's sovereign debt crisis. Reuters says (6/24):
"A Greek default would roil the $2.7 trillion money market mutual fund industry, which Federal Reserve Chairman Ben Bernanke highlighted...when he described the funds' exposure to European banks as 'very substantial.'"
Just how "substantial" is this exposure to European banks? The president of a financial firm said this to CNBC (6/24):
"If you look at the largest money market funds in the United States, they still have an exposure of 40 to 50 percent in some fashion to Greek debt...if you follow the trail back it's a contagion problem. The French banks and Spanish banks -- they're holding tons of Greek debt and that's where the problem lies."
The fact that a substantial percentage of U.S. based money market funds have holdings in European banks doesn't mean a given money market fund will suffer a loss. Yet exposed money market funds may be at risk if the sovereign debt crisis escalates. Some fund managers are preparing for the possibility of an illiquid market:
"U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining."
Bloomberg (6/27)
EWI's
Robert Prechter addressed money market safety in the second edition of his New York Times bestseller,
Conquer the Crash (p. 165):
"Most cautious investors think that their funds are utterly safe, even guaranteed, in any money market fund. Do not fall for this illusion. Money market funds are relatively safe, but they are still nothing but portfolios of debt, short-term debt to be sure, but debt nonetheless. When a company or government goes bankrupt, it stops paying interest on its debts, short-term or long, right then."
Some money market fund managers try to increase their competitiveness by seeking higher yield at home and abroad. Investors have likewise been chasing yield in recent months.
Along with the quote from Bernanke, the Reuters article mentioned above says investors pulled $3.6 billion out of "prime" or non-Treasury money market funds recently. But that's a drop in the bucket vs. the money which remains in higher-yielding funds.
What should a safety-minded investor do?
In the latest Elliott Wave Theorist, Robert Prechter presents his updated analysis of "investment safety."
Prechter describes what the financial media has mostly overlooked, namely that the door has already closed on other safe havens he previously described.