Selling Toxic Debt to Seniors (BusinessWeek,
August 18, 2008), tells the story of investors who lost huge sums
of money when seemingly safe income funds offered by Memphis broker
Morgan Keegan, a subsidiary of Regions Financial (RF),
lost much of their value due to subprime mortgages.
Once the subprime mess surfaced, it didn't take long for seven
Regions
Morgan Keegan income funds (RHY,
RMA, RMH,
RSF,
MKHIX,
MKIBX
and MSBIX)
to collapse. For example, the RMK Select Intermediate Bond Fund
(MKIBX)
is down almost 88 percent from its closing high of $8.08 set on
March 2, 2007.
NOTE: The seven funds are now managed by Hyperion
Brookfield.
Protect Your Money
How could these investors have protected themselves from such serious
losses? First, investors must realize that any investment is risky,
particularly if it seeks higher than average returns. And income
funds are no exception. Just because an income fund has been stable
for years, does not mean that it can't go bad very quickly. If the
fund holds risky investments, and they go bad, investors will lose
principal as well as income.
You need to know what investments the fund holds. If you don't
know about the holdings, don't buy the fund. And if you find out
what it holds, but do not understand the workings of the investments,
don't own it.
Second, don't load up on just one or two funds, particularly like
funds from one company. Own funds with different type of holdings
from different companies. Then if one or two funds go bad, you're
not wiped out.
Third, watch the price pattern of the fund. When Regions Morgan
Keegan income funds started down, investors should have been suspicious
that real trouble was coming.
Could the RMK investors have prevented their funds from collapsing?
No, but they could have minimized the damage to their financial
and emotional well-being by doing their homework.
Related Articles:
Bond Funds
Introduction
to Portfolio Diversification
Price Chart
Primer
Posted August 11, 2008.
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