Whenever you hear someone call an investment "almost as good as cash," be wary… Wall Street firms can fit a lot of risk in the word "almost."
You can understand the appeal of "almost as good as cash." Today, bank accounts yield around 0.01%. That's an outrageous return, but at least it's safe.
However… what if you could generate a yield around 10%… and rest assured your capital was almost as safe as cash in the bank.
That's what drives investors to "reach for yield." It's a scenario that always ends poorly. Just look at the history of a once-popular investing vehicle called "world income funds."
In 1989, yields on money market funds topped 10%. At the time, these funds were the safe place middle-class Americans could earn high yields on their savings. That changed in June 1993, when rates on money market funds fell to 3%… then to an all-time low.
Suddenly, investors needed somewhere to continue earning safe, high yields.
That's when world income funds were introduced. These funds invested in short-term government debt in the local currency, much like money market funds invested in U.S. short-term securities.
These seemed like a dream come true for investors, routinely posting double-digit annual returns and equally healthy yields. When these funds were sold to investors, brokers focused on their safety… Magazine advertisements touted "transfer kits" that made it easy to move money from a maturing certificate of deposit (CD) into a world income fund.
However, brokers and investors ignored the fact that these funds invested in risky currencies to generate higher yields.
The party didn't last long. In December 1994, some of these funds fell 20%. Unfortunate investors, sold on the idea that the funds were a safe, stable place to park their cash and earn a little extra yield, lost millions.
It's one thing to lose 20% on a stock. That's manageable. It's another thing to lose 20% on something that is touted to be as safe as cash.
The fund industry has tried to forget – and hide – these losses. Author and financial columnist Jason Zweig writes in The Little Book of Safe Money: "They have been erased from history, as if they had never been there." He continues:
As sure as the sun rising in the east, Wall Street is forever inventing another newfangled way to promise … 'returns better than cash with no more risk.' … Tragically, time after time, investors have been told the same fairy tales about low risk and high yield – right before they lost a huge chunk of their hard-earned money.
And it's not just history. As recently as a few years ago, so-called "safe" cash investments blew up. This time, the short-term bond funds held risky mortgage securities as a way to juice returns.
Here's the thing… Cash is one of the most important factors for your ability to live well.
We don't mean how much you have… or how many dollar bills are stacked up in your sock drawer… We mean where you put it, and how to access it.
We've found a safe – and simple – way to earn 3%… Read more here.