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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
Ask Dr. Don
FDIC-insured accounts just one option
Ask Dr. Don

More than one way to keep $600,000 safe

Dear Dr. Don,
I want to know if it would be safer if I keep my liquid savings of up to $600,000 in six banks insured by the Federal Deposit Insurance Corp. (with each one insured up to $100,000 insurance limit) rather than keeping that amount in Vanguard's Treasury Money Market Fund with the same or even a better rate? It is a headache for me to keep track of that amount of money in six different banks.
-- Abraham Aggregate

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Dear Abraham,
It's hard to do better than a full faith and credit guarantee made by the United States government, and that's what you get with an FDIC-insured deposit. If you have some flexibility in how the accounts are titled, you can have more than $100,000 in insured deposits at a single FDIC-insured financial institution. The FDIC publication, "Your Insured Deposit" explains this in greater depth, but you may not be able to have all your deposits at one bank and have them fully insured.

Another alternative is to use a bank that participates in the Certificate of Deposit Account Registry Service program. You can deal with one bank, but that bank would work with others to have all of the deposit insured. CDARS can insure deposits up to $50 million. This Bankrate feature "CDARS: An easy way to beat the $100,000 FDIC limit" explains the program in greater depth.

Money market mutual funds are not insured. The fund could conceivably "break the buck," meaning that the value of a share would drop below $1 per share. I asked Amy Chain from the public relations group at Vanguard, to weigh in on the safety of an investment in the Vanguard Treasury Money Market Fund. Here are some of her comments:

"Shareholders own shares of the mutual fund in which they're invested; they do not directly own shares of the fund's underlying securities (this actually spreads the risk of owning an individual security among the fund's many owners ... it's one of the benefits of owning a mutual fund). If a fund were to be liquidated for any reason, the mutual fund itself would sell the securities it owns and divide the proceeds among fund shareholders.

"A shareholder's 'claim' on a portfolio would be proportionate to the number of shares that they own and the fund's price-per-share. In a money market fund in which each share is equal to $1, that's a pretty simple calculation. So, for example, 600,000 shares of a money market fund would be worth $600,000.

"To reiterate, Vanguard Treasury Money Market Fund invests solely in high-quality, short-term money market securities whose interest and principal payments are backed by the full faith and credit of the U.S. government. In addition, Vanguard's money market funds are run by an experienced team of professional managers, have long track records, and have maintained a $1 net asset value (dollar value of one share of a mutual fund at the close of the trading day). A necessary 'liquidation' in the sense that you've mentioned is highly unlikely."

Money funds are facing some pressures in the current investment environment and some are struggling to "protect the buck." That said, a Treasury money market fund is generally one of the most conservative money market investments when it has an investment policy of only investing in U.S. Treasury securities.

Investors in money market securities, including short-term CDs, have to strike a balance between safety, convenience and yield. I can't tell you which of the alternatives you're considering is right for you because I don't know the weighting of these three factors in your decision of where and how to invest. I can tell you like convenience and that you're worried about risk, but the yield pickup appears attractive to you, too. I've given you the background to make a better decision but it's still up to you.'s corrections policy -- Posted: Dec. 17, 2007
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