How Safe Is Your Money?

On the investment risk scale what is deemed to be lowest risk or completely safe investments is cash. Recent events can be an eye opener about the no-risk or ultra-safe assumption we make about such investments. I describe three such situations -

• Money Market Funds One of the safest investments around which kick back a decent interest rate while maintaining a net asset value of $1 per share. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. So what is wrong with these funds? Recently some investment banks/brokerage accounts ended up investing money market assets in subprime issues with unpleasant consequences. This was a small minority and the most money market funds were fine but nothing is risk free. For more on this subject puruse the following article Seattle Times
  
  
• Money in the Bank Your money is at risk even when deposited with an FDIC insured bank. This is another setback to the ultra safe theory of putting your money in the bank. The recent collapse of NetBank highlights the fact that banks also go bust - although rarely. Read more on this topic at SmartMoney.
  
  
• Cash is King Not in a world where everything is relative. Then it's a question of - is mine bigger than your? I mean cash is only as good as what you can buy with it. And the recent weakness of the dollar against the euro and other currencies makes a European vacation more expensive, foreign made cars will cost more (WSJ - Buy Your BMW Today) and imports will become more expensive. In the end it's the same dollar but it is buying less (and we are not even considering inflation). Hardly an ultra-safe investment option.

All investments carry risk. Knowing what you are doing, understanding the consequences and being smart with your money mitigates the risk.