We have been fielding questions from clients who are invested in Free Market Funds and concerned about their possible exposure to the recent Bankruptcy filing by the City of Detroit.
First: The Fixed Income Free Market Fund does not invest in Municipal Bonds. These bonds have longer maturities and historically are not a good tool for diversification. Consequently you have no exposure there. Good news.
Second: US and International Free Market Funds are diversified into nearly 13,000 holdings in 42 countries. Any corporation that is negatively impacted by the bankruptcy filing in Detroit will not significantly impact your investments as a whole. True Diversification reduces your risk. Again, good news.
Third: There is a lesson to be learned here! If you are participating in a pension or defined benefit plan that is promising payouts beyond what the free market can deliver, they will eventually have to reduce benefits! No entity, private or public, large or small, can promise more than what the funded contributions and the free market returns can support over the long term. There are fewer and fewer pensions offered to employees today. Pension savings have been abused and underfunded with such regularity over the past 30 years, and it is difficult to count on them. If you have one, treat it as extra income for retirement. Make plans to save for yourself as a primary source of income replacement.
This is a sad story for a great city like Detroit. Their debt problems were not a secret, but it did not need to play out like this. There is a lot of uncertainty and there will be good people who will be negatively impacted by this bankruptcy filing. However, I believe that Detroit will find their way through this and the City will once again be a strong and vibrant contributor to the long term success of Michigan.
Let me know if you have specific concerns regarding this bankruptcy filing by the city of Detroit. Stay in touch!