Using a Money Market to Hedge Your Risk

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Can money markets protect me against loss?

Using a Money Market to Hedge Your Risk

When looking for a money market savings rate, the actual rate you're quoted is only part of the benefit of investing in that vehicle. In fact, in a volatile market, a money market account offers a perfect fixed hedge for your retirement or other brokerage account.

What is a hedge?
All investments present a certain amount of risk. The way that you can combat that risk is to invest in different types of risk. In doing so, you create a small amount of protection against loss, because as one investment goes down, another may go up or at least remain stable. This counterbalance is considered a hedge.

How do money markets hedge?
Money markets are fixed investments, so you aren't going to lose money when you invest in them--unlike stocks and mutual funds. That means that, while all your other investments could lose money, a money market will not and will continue to experience small gains. That hedges you against complete financial ruin.

So consider a money market account for your short-term savings and for a small portion of your long-term savings in order to help you hedge against loss to some degree.

   

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