Safe ways to stash your cash

Despite the current market turmoil - rest assured - there are still three places where your money has some degree of protection.

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By Money Magazine staff

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(Money Magazine) -- With stocks and bonds in turmoil, and the housing market still in the dumps, you're probably wondering: Are there any safe places to stash your money in this market?

It may not seem like it, given that some of the most conservative vehicles, including money-market mutual funds, have come under pressure in this financial crisis.

For example, The Reserve, the nation's first money fund firm, announced in mid-September that investors in its Primary Fund would lose value. This marked the first time in more than a decade that a money fund has handed its investors losses.

Savers who tried to eke out a little extra yield than money funds provide experienced their own set of chills recently.

Ultra-short-term bond funds invest in debt with maturities ranging from three months to a year - and are therefore supposed to be just one notch higher than money funds when it comes to risk.

But thanks to, you guessed it, bad bets on mortgage-backed securities, the average ultrashort bond fund lost around 4% over the past year. Some funds, like Schwab YieldPlus Fidelity Ultra-Short Bond have seen double-digit losses in the past 12 months.

But rest assured, there are still extremely safe places to stash your cash. Among them:

Bank money-market accounts and CDs

While it's hard to tell which banks will eventually survive this financial meltdown, remember that bank CDs and money market accounts (not to be confused with money market mutual funds that are run by fund companies) are FDIC-insured.

That means deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the Federal Deposit Insurance Corp. (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.)

Even better: Because the Federal Reserve has not yet lowered short-term interest rates, many CDs and money market accounts are offering higher yields than you would find in a taxable money fund.

Recently, you could earn as much as 4.5% on a one-year CD, while bank money market accounts were yielding as much as 3.5%. Both are far better than the average 1.9% rate on money market funds.

Stable-value funds

Chances are, your 401(k) offers a stable-value fund. Check it out. Stable value funds invest in high-quality short- to intermediate-term bonds, which are guaranteed by insurers against loss, as well as interest-bearing contracts from insurance companies.

Has your faith in insurance companies been somewhat shaken in this financial storm? Don't worry. Most stable-value funds invest not only in a diversified portfolio of debt but also in securities covered by several different insurers. And these funds were recently yielding around 4%.

Money Market Funds

Even though one prominent money fund just broke the buck, Uncle Sam has recently stepped to shore up confidence in these popular cash vehicles. On Sept. 19, the Treasury Department put in placea new guarantee for money funds - essentially a type of FDIC insurance - promising that investors will get $1 back for every $1 invested, with no dollar limit.

The so-called Temporary Guarantee Program will last only three months but can be extended into 2009 if needed. Because it only applies to cash that was in money funds as of Sept. 19 - and since not all money funds will choose to sign up - you still have to do to some homework to stay safe.

So call your money funds to see if they intend to purchase this government insurance. Also, stick with financial firms such as Vanguard, Fidelity and American Funds that have the financial resources to preserve the $1 share value in their funds.

And don't "stretch" for yield. The average yield for taxable money funds is 1.9%. If you see one whose yield is much higher, that could be a sign that it's taking too many risks. To top of page

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