Warning: Additional revenue - extra risk - Oct. 16, 2008

After all, it's safe, liquid cash - not shares of Lehman Brothers. On the other hand with financial hurricanes pounding the markets and your portfolio, you longing to be confident the way you require in the attached year or two is tucked absent in a in fact unharmed haven. So which of your cash accounts felicitous this definition? Not as distinct as you once believed.

As it turns out, still money-market money aren't as defended as you may accept assumed. On the contrary there has extremely been a fright in so-called cash alternatives, which are marketed to investors seeking slightly higher yields than traditional cash accounts provide. Occasion in point: ultrashort bond funds. These method invest in obligation securities with ever short maturities, ranging from three months to a year.

This should levy them aloof one gouge higher on the risk scale than resources funds, which clench securities with morals maturities of 90 days or less. Ultrashort bond funds, therefore, are designed to harvest a bit exceeding than bill wealth nevertheless with one a miniature extra risk. At least that was the theory. Not exclusive has the principles ultrashort bond fund irrecoverable approximately 5% over the foregone year vs. 2.6% customary advantage for taxable cash funds, however some portfolios own been outright disasters.

Poisonous cash way Among the resources that obtain stumbled badly: Schwab YieldPlus has astray a staggering 33.7% of its appraisal over the preceding 12 months, while Constancy Ultra-Short Bond fell 10.5%. How is it practicable that a bond fund that's supposed to be affection cash suddenly loses as yet as a stock?

In an endeavor to boost yields in this low-interest-rate environment, frequent of these portfolios invested in securities that were - you guessed it - backed by subprime mortgages. And when the subprime imploded ultimate year, the means began sinking into the red. At that location investors fled, which isolated worsened the losses because managers were forced to sell toxic securities at fire-sale prices to come up with sufficiently cash to reconciled redemptions.

These failures in fact bell into interrogation the prospect of the ultrashort bond fund category," says Morningstar analyst Miriam Sjoblom. Investors looking for stability de facto should double o elsewhere." All of which may compass you wondering where you can much bargain safety plus a decent output - at least decent enough to outshine bankroll process and look after your money's purchasing power.

Here are a couple of options, with the lowest-risk election described first. Cash-alternative alternatives Bank CDs and money-market accounts For absolute safety, you can't beat the FDIC guarantees on CDs and money-market accounts managed by banks (not to be distracted with almighty dollar mode escape by mutual fund companies). Yet whether your bank goes under, you'll be covered for losses of up to $250,000 per workman per financial institution.

And all the more though the Federal Reserve has started reducing short-term keeping rates, you can yet boast good-looking yields, says Greg McBride of Bankrate.com. Stable-value income Provided you admit a 401(k), you probably hold a stable-value fund in your menu. Are there any assurances these funds won't entertain burned by, say, morgage securities? No, but the underlying investments are backed by insurers.

While that might ante up community consolation in this financial melt-down, detain in apperception that most stable-value funds invest not lone in a diversified portfolio of debt but very in securities covered by various discrepant insurers. What's more, multifarious 401(k) plans city trading restrictions on stable-value funds to prevent bazaar timing. You can authorization the fund, but you may hold to stadium that bucks in a inventory fund for a hardly any months before continuance allowed back in.

As a result, your person shareholders won't be able to dream up the equivalent problems they did in ultrashort bond funds by forcing managers to sell at the worst potential time. Of course, there's no warrantly they'll keep on to act so. But the study's co-author David Babbel, professor emeritus of insurance and risk state at Wharton, says, "Stable-value funds are all the more the bad gamble for the fixed-income quota of your 401(k)."

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