Anyway, the money we were planning to use for the purchase I kept in a Vanguard Tax-Free Money Market Fund.

“I know a better alternative,” one broker told me. “I have a money market plus fund that will yield more, even after taxes.”

I told him thanks but I wasn’t interested.

“What’s wrong with a higher yielding money market?” he asked.

“Nothing,” I said. “It’s the ‘plus’ that bothers me.”

As a young man starting out on Wall Street, I confess I learned many lessons the hard way. One is that every financial product with a plus has a corresponding minus. The bigger the plus, the bigger the potential minus.

You want to own junk bonds instead of high-grade corporates? Expect hair-raising volatility – and occasional defaults – from time to time.

You want to own stocks instead of bonds? Good idea. But, remember, the trade-off is likely to be occasional sleepless nights.

You want the even higher potential returns available in companies headquartered in Brazil, India or China? Fine. But expect to go off Niagara Falls from time to time. That’s just the nature of emerging market investing.

Of course, most people don’t expect too many thrills and chills in a “money market plus.” This year, however, Halloween arrived early.

Friday’s Wall Street Journal reports that Charles Schwab is offering settlements to investors in its Schwab YieldPlus Fund, advertised as “a vehicle for conservative investors looking for a slightly higher yield while preserving their capital.”

So far this year the fund is down 26%.

Some investors are wondering what the heck happened. Here’s a brief tutorial.

Money market funds generally invest in high-quality, short-term securities with minimal credit risk. They pay dividends that fluctuate, reflecting what is happening with short-term interest rates. According to the Investment Company Institute, approximately $3.4 trillion was invested in money markets at the end of last week. (Stock funds, by comparison, hold roughly $6.5 trillion.)

A “money market plus” or “ultra-short-term bond fund” is a different animal. These are known as “enhanced cash” products.

Enhanced cash funds are typically not registered with the SEC and seek higher yields than money market funds. Unfortunately, Milton Friedman was right. There is no free lunch.

To earn these higher yields, enhanced cash funds exceed the SEC rule restrictions on money market funds governing the credit quality, diversification, and maturity of investments.

In Schwab’s case, YieldPlus bet heavily on mortgage-related securities. When those securities tanked, so did YieldPlus.

Schwab has offered a settlement to investors, who had more than $13 billion invested in the fund at its peak last year. But the offer amounts to pennies on the dollar.

Schwab isn’t the only company to experience this problem, incidentally. Other major Wall Street firms have paid millions to settle similar class-action suits.

The lesson here? Higher yields always come with higher risks. Always.

Long-term bonds can get creamed while short-term bonds hold steady. Junk bonds can default while Treasuries rally. And the “plus” in your money market plus fund?

Read the prospectus. Some day it just might turn into a minus.

Good investing,

Alex

So Easy You Could Start Investing Tomorrow

The investing public is already in the know when it comes to exchange traded funds (ETFs). Your average Main Street investor can tell you ETFs cover certain market sectors or styles of investing. Many even realize there are ETFs that cover the international markets.

However, it’s not always publicized that you can easily use these products as pure currency plays. These days, you can buy exchange traded funds that are pure currency plays on all the major world currencies.

Currently you can buy eight major currency ETFs. These include the euro (FXE), British pound (FXB), Mexican peso (FXM), Swedish krona (FXS), Australian dollar (FXA), Canadian dollar (FXC), Japanese yen (FXY) and Swiss franc (FXF). These eight currencies have interest rates ranging from 7.50% on the Mexican Peso to a low of 0.50% on the Japanese Yen. The symbols for most of them are very easy to remember too.

You can invest in these revolutionary products with any standard brokerage account the same way you would buy shares of IBM or Google. For example, you could call up Charles Schwab, E*Trade, Ameritrade, Merrill Lynch, etc., and buy a currency ETF tomorrow.

Bet on Your Favorite Offshore Country with Their Currency

So if you think any one of these countries has a bright economic future and will go up over time, you can trade that opinion.

For instance, for a long time now Jack Crooks and I both have been bullish on the Australian dollar due to its high growth, high inflation, high interest rates, low unemployment and demand from China. You can see from the chart below that the currency has really taken off and done well.

The Land Down Under Stays On Top!

So if you’re bullish on Australia and think it’s going up, buy a comfortable amount of the Currency Shares Australian Dollar Trust (traded on the NYSE as symbol FXA). It’s that simple.

Any way you slice it, currency investing has never been easier.

SEAN HYMAN, Currency Analyst

EDITOR’S NOTE: These days, there are literally dozens of interesting ways to invest your portfolio outside the dollar – from safe, stable long-term currency plays (that guarantee you never lose a dime) to sexy foreign-exchange trades. Whatever your investment style, our 33 experts will explain exactly how to maximize your retirement fund and diversify your investment portfolio out of the sinking buck this May at our Total Wealth Symposium. Still haven’t reserved your spot at this event? Sign up before Monday, April 21st and save an extra US$150 off the attendance fee. Click here.