October 22, 2015
By: Gordon Haave, Managing Director Agora Trust
Curtis De Young, the founder and CEO of American Pension Services in Riverton, Utah thought he could use a staggering $24 million of customer cash to make himself a fortune.
His plan: To get rich by investing the cash into high-risk investments into companies owned by his friends. If everything worked out, he would have walked away with the gains from the investments, and pay the original money back to the customers he stole it from… all without them even knowing it was gone.
It’s the classic case of a misappropriation of funds. Sometimes funds are stolen for personal use. Usually, however, the “brilliant plan” is to “borrow” the funds for one purpose or another with the intent to pay them back. This was the case I wrote about two weeks ago when Jon Corzine, the CEO of MF Global “borrowed” customer funds in order to meet a margin call. Corzine thought the trouble would pass and he could shift the funds back without investors even knowing. In fact, indications are that he did this a few times before and got away with it.
Just as it didn’t work out for MF Global, it didn’t work out for Curtis De Young and American Pension Services. The businesses in which he invested customer cash didn’t work out, and $24 million of customer assets were gone.
Instances like these are scary. You’ve worked hard for your money, and you don’t want it misappropriated.
How do you keep your money safe? In my last article, “Will Your Savings Survive the Next Banking Crisis?”, I outlined the basics. In short:
A bank is not the best place. When you deposit money in a bank, it is no longer your money. It is the banks money and you are now just a creditor. That is, a claimant on the banks assets. If the bank goes under, you can lose a portion or all of your funds.
It is better to be in a brokerage where your money stays as your money, in its own account.
However, even that is not fool proof. As we saw with MF Global and American Pension Services (not a broker, but a similar concept) if you leave your money in cash, it is available for someone to steal.
So while step one is to leave your money with a broker, step 2 is to actually invest it in something so that it is not sitting as cash.
This could be a portfolio of stocks, bonds, or commodities. If all you are looking for, however, is a substitute in cash, then you want to be looking at various money market mutual funds.
The question, of course, is how to choose one.
What Is A Money Market Mutual Fund?
A money market mutual fund (MMF) is a mutual fund that is designed to replicate the safety and security of cash while paying a small bit of interest. This is accomplished by holding a number of very short-term bonds that regularly come due so that cash is available to pay anyone who wants to redeem their MMF’s on any specific day.
There are many MMF’s available, with varying degrees of safety.
- There are MMF’s invested entirely in Treasury debt instruments.
- MMF’s invested entirely in Government Sponsored Entity (GSE) debt.
- MMF’s that invest in a broad range of short-term debt, including mortgage debt.
How Safe Are MMF’s?
MMF’s are very safe. Of the roughly 750 MMF’s available, investors in only 22 of them incurred any loss if they withdrew their money during the 2008 crises. That average loss was 2.2%.
Diversifying your cash into multiple funds can minimize this small chance of a small loss, remove the chance of misappropriation by the broker, and remove the chance of a 100% loss sitting in a bank.
The Best MMF?
“Best” is a relative term. However, if you are looking for a safe place to park your cash and to keep it from being stolen or lost in a bank collapse, then the best available MMF’s today are those offered by Vanguard.
Vanguard not only pioneered the low cost model for a variety of mutual funds, it also took the first step to make sure all of its customers are protected during the next meltdown. Back in May, Vanguard announced it entered into a $2.89 billion credit facility in order to back Vanguards ETF’s and Funds in case of a market meltdown, ensuring that your “cash” is as safe as possible before the next crash.
You are right to be skeptical of banks and politicians. They hardly give you any reason to trust them at all given the total lack of accountability. If you are ready to keep the would-be thieves honest, and your money safe, then we’re ready to discuss what options might best suit you. Click here to contact me, and let’s get started!