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How to Protect Your 'Cash' From Crash

NEW YORK ( TheStreet) -- If you're an investor who likes to keep ample amounts of "cash" in your brokerage account, you may want to consider opening an online savings account linked to a brokerage account instead. Here's why:

Most brokerage accounts require investors to hold cash in a money market mutual fund: These funds can lose value and are not FDIC insured. If short-term debt inside of a money market fund cannot be paid (or paid in full), investors will be forced to absorb losses. The likelihood of your money market fund "breaking the buck" (dropping below $1 per share) is extremely unlikely, but it has happened in recent history ( notably, following Lehman Brothers' collapse in 2008).

But these funds do face real risks: An unintended consequence of the Federal Reserve's zero-interest rate policy (ZIRP) is that money market fund managers have been directed toward investment outside of the U.S. -- these investments might be susceptible to a European debt crisis.

One way to bypass the risk of holding your liquid investments in a money market fund is to open an online savings account that allows you to make instant cash transfers to a linked brokerage account. Banks that offer this functionality include ING (ING - Get Report), E-Trade (ETFC - Get Report) and Wells Fargo (WFC - Get Report).

That means that you can leave your cash parked in an FDIC insured bank account (collecting a yield higher than most money market funds, insured up to $250, 000), and if you see a security that you'd like to purchase, you can instantly transfer your money to your brokerage account.

For investors with less than $250, 000 of cash held in brokerage accounts, this is a simple way to protect your capital and enhance short-term yield.

-- Written by John DeFeo in New York City

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