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