The shortfall is nothing compared to the double-digit plunges many stocks have taken this year, but the whole idea behind money markets is that they should never lose money and fall below $1 a share. Falling below $1 is called "breaking the buck."
Unlike bank accounts, money market investments are not insured by the Federal Deposit Insurance Corporation or any other agency. Brokerages have always said that they carry risk but a widely held understanding is that they will not lose value.
Fidelity, Vanguard and other major fund mangers prominently posted messages on their Web sites this week trying to reassure investors of the stability of their money market accounts.
Analysts, personal finance advisers and other fund managers all said this was an isolated incident and should not reflect on the health of other money market accounts.
In fact, the decline in the Primary Fund is only the second time in history when such a fund has actually lost money. The other instance was in 1994 when the Community Bancshares fell. The fund was liquidated and investors ended up losing about 4 percent of their money.
"The fundamental structure of money market funds remains sound. These funds are subject to strict regulation governing credit quality, liquidity, diversification and transparency," the Investment Company Institute, the industry's trade association, said Wednesday.
Overall, there is $3.6 trillion invested in money market funds, according to Mike McNamee, spokesman for the group.
Nearly $1 trillion have come into the fund in the last year as people have moved their money away from stocks in this unstable market.
There are more than 800 money market funds out there and 33 million households invest in them.
David McPherson, founder and principal of Four Ponds Financial Planning and an ABC News personal finance columnist, said small investors should pay attention.
"The vast majority of money market fund holders do not need worry about it, but they should pay attention to what is happening, if anything, to understand how money market funds work," McPherson said.
Money markets are used by people waiting to put their money into other stocks later or very conservative investors near retirement. McPherson said many of his retired clients have large sums of money in such funds.
"If you do see a money market fund that is paying quite a bit more than other money market funds, that's something you need to question why," he said. But he noted, "A top firm like Vanguard or Fidelity is going to do everything possible, within their power, to avoid breaking the buck with their money market funds."
Lawrence J. White, an economics professor at New York University's Stern School of Business, said such failures are "highly rare."
"If you had invested in Lehman Brothers stock or Fannie [Mae] and Freddie [Mac] stock, whatever price you paid, you would now have zero or very close to zero," White said.
Investors in this one fund still have 97 percent of their investment.
"Nobody likes to lose even 3 percent, but gee the losses are a whole lot smaller than if you had invested in the common stock of these companies that had gone bust," he said.
Money market funds aim at having a higher yield than regular savings accounts but are much more conservative than other mutual funds or stocks. Generally, the riskier an investment the larger the gain or loss.
As for the Reserve Primary Fund, White said: "They reached for yield and got burned."
White said large mutual fund companies like Vanguard or Fidelity would do everything in their power to avoid letting their money market accounts lose value.
"They could well decide that it is worth it for us to sacrifice some profits to subsidize some loss we might have because our brand-name reputation is so important," he said.
In a message to investors today, Vanguard said that all of the investments in its money markets "are closely examined" by its "highly skilled and experienced credit analysts." It also noted that one of its funds has no exposure to types of investments used by dealers including Lehman Brothers and does not include any AIG stock.
Fidelity said on its Web site: "We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments."
The company said it is "our #1 objective" to keep the fund's value above $1.
Fidelity spokesman Vin Loporchio said the message was posted because the company wanted to be proactive in reaching customers.
"Obviously this week has been out of the ordinary," he said.
Fidelity is the country's largest mutual fund company and had $432.5 billion in money market funds at the end of August.
Deborah Cunningham, chief investment officer of taxable money markets for Federated Investors, said she didn't see any reason for investors to panic.
When choosing a fund, she said, see if it fits with the company's core business or if it has grown out as a new side business.
"This is an industry that has experienced tremendous amounts of safety and liquidity," she said. "This is a single aberration, but nothing more than that."
