Safe Investing in a Troubled Economy

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MONEY MARKET MUTUAL FUNDS

Early in the week of Sept. 15, investors started a money fund version of a run on the bank. Nearly $200 billion cascaded out of money funds before stopping on Sept. 18 when the Treasury Dept. put the full faith and credit of the U.S. taxpayer behind the implicit "don't-break-the-buck" pledge at money funds. The principal value of money-market funds—including tax-exempt ones—is now guaranteed.

BANK SAVINGS ACCOUNTS

Investors can earn a good yield and enjoy FDIC safety at online banks. At ING Direct (ING), for instance, a savings account pays 3% and a 12-month CD, 4%. No one with an account of $100,000 or less has lost a penny from a bank failure since the government's insurance fund was created in 1933. (Federal credit unions have their own backstop, the National Credit Union Shares Insurance Fund.) The $100,000 limit is something of a misnomer. It's relatively easy to park a multiple of that sum at the same bank and get it insured. For instance, a husband and wife can each have an account with $100,000 and an IRA holding a certificate of deposit worth $250,000, plus a joint account with $100,000 per spouse. That covers $900,000.

The family could up the insured amount through revocable trust accounts, such as a payable-on-death (POD) trust that allows $100,000 per beneficiary. If the couple has three kids, the husband can have a $100,000 POD account with his wife as beneficiary; she can do the same with him. The couple can also have a $600,000 POD account with their kids as equal beneficiaries. According to the FDIC, an additional $800,000 is covered, for $1.7 million at one bank. One can open up accounts at different banks, but it may be easier to track multiple CDs by buying so-called brokered CDs. A broker will take, say, $1 million and buy 10 $100,000 CDs, each at a different bank. This keeps paperwork in one place.

CURRENCY HEDGES

Most of us are focused on safety now, but there's also concern about the falling value of the dollar. Anyone worried about a weak dollar in the wake of the government's bailout might consider a currency-denominated CD. EverBank in Jacksonville, Fla., offers a euro CD that's FDIC-insured. The minimum is $10,000. As of Sept.24, a three-month euro CD yields 2.38% and a one-year euro CD, 2.75%.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on BusinessWeek.com.