© St. Petersburg Times, published April 20, 2003
Money market investments may offer paltry yields, but at least they are safe -- or so we hope. But that's no longer something we can take for granted when we see the phrase "money market."
A reader recently raised the question regarding his investment in the Ford Money Market Account, which has a juicy yield of 3 to 3.4 percent, depending on account size.
"Has any money market fund failed in the last 20 years?" he asked. The answer is "no," but the question was the wrong one to ask. The Ford Money Market Account is neither a money market mutual fund, which legally would have to be diversified, nor a bank money market account, which would carry FDIC insurance.
So what is it? A convenient way to lend money to Ford, the automaker. As Ford Financial explains on its Web site, "Your funds are used to purchase demand notes issued by Ford Motor Credit Co." The account offers above-average yields because it carries above-average risks.
The auto industry is suffering from the downturn in the economy, and Ford's credit rating is being closely watched. Ford may very well make good on its obligations, but investors need to be aware of the risks. An account like this isn't the place to stash your entire life savings.
A good rule of thumb is that investors should not have more than 10 percent of their money in the securities of any single issuer -- and a 5 percent limit is even safer. Ford stock, the Ford Money Market Account and other Ford debt should be counted together to apply the limits.
Mutual funds are already diversified, so defaults pose much less risk. But even some money market mutual funds would have suffered losses in the past had their sponsors not stepped in and bailed them out. That's a reason not to have all your eggs in one or two baskets, even if those baskets are traditionally safe money market funds.
Q. My wife and I live comfortably, and I plan to retire in 10 years. We are both very conservative and risk averse. Our mortgage has 10 years left on a 15-year term at 6.75 percent, which is not deductible because we do not have enough deductions to itemize. With CD rates as low as they are, I thought paying off the mortgage would be the best and safest investment we could make in our future. The drawback is that it would use up all but about 25 percent of our cash.
My wife is very much opposed, and when I ask her why, the only reasons she gives are the war and the uncertain state of the economy. Do you have any suggestions for convincing my wife that mortgage payoff is a smart move?
Most likely your wife is worried about being left without enough cash to carry you through an emergency. If there is any chance that you or your wife could lose your jobs, you need to be sure that you have the ability to survive at least three to six months without that income. However, your resources don't have to be entirely in cash. If you pay off your mortgage, you could apply for a home equity credit line you could tap during an emergency. Look for one that has no annual fees or closing costs.
You also could rebuild your savings by replacing your monthly checks to the mortgage company with monthly checks to your own savings and investment accounts.
Your plan makes sense because paying off your mortgage is the same as a risk-free 6.75 percent return on your money. However, if your wife is not convinced, consider working out a compromise. If you paid off half your remaining mortgage, you still would have payments, but they would end sooner. You can use a mortgage calculator (check out the one at www.bankrate.com) to see the impact of extra payments.
Q. I presently hold 392 shares of Enron stock, which I assume will never be worth much. I do not have a broker. How can I go about selling these shares so I can take advantage of the loss of money on my income tax at $3,000 per year? I am 75 years old and would like to recoup some money. I know next to nothing about stocks.
If you don't have a broker, you will have to get one. Since this is a simple transaction and you are not looking for ongoing financial advice, you should shop around for the lowest possible price. Call a few discount brokerage firms and ask what they would charge to sell these shares. You will have to open an account. Be sure to close it after you have withdrawn your money if the brokerage firm charges any account maintenance fees.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.