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Money market funds surge in market turmoil

The widening credit market crunch has prompted many investors to lock up their gains and cut losses by selling stocks and retreating to the sidelines. Statistics show that they're socking those dollars into money market funds until they feel it's safe to move back into stocks.

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Retail money market funds have gained more than $52 billion since mid-July as investors have grown more wary of the subprime credit debacle. (The chart below shows the weekly inflows to money market funds.)

Chris Wloszczyna, a spokesman at the Washington, D.C.-based Investment Company Institute, says the growth in retail money market funds has been impressive since about 2004, which may coincide with an increase in the number of high-yield funds. This recent surge, however, has been unusual.

Brad Durham, managing director of EPFR Global, a provider of fund flows and asset allocation data, says some investors began redeploying their money back into the stock market the week of Aug. 13, but, nevertheless, the piling into money market funds has been spectacular.

"It's off the charts," says Durham. "It's remarkable the speed at which money flows these days.

Growth in retail money market fund assets
Growth in retail money market fund assets

Risky business in U.S.
Curiously, Durham notes, people appear to be investing money in U.S. equities; a move that could be risky.

"In times of panic people look at their portfolio and decide where they can take profits first. It so happens that the healthier profits lately have been in their global allocations. It's kind of ironic that people are pulling out of global allocations and moving the money back into U.S. equity funds when the U.S. is the source of the crisis, it's where the deficits are the biggest and the vulnerability is the biggest."

Peter Crane, founder of Crane Data LLC and publisher of Money Fund Intelligence, says the surge in money funds is more a sign that things are booming than a flight to safety.

"Market timers and day traders are overrated. Thankfully, there aren't that many of them. The smart money, the vast majority of money, is super long-term and doesn't move. When someone makes a decision to be in cash it's dictated by circumstance, not market events. It's there for a down payment on a house; it's there for an emergency reserve. People swinging back and forth are less than 5 percent of investors -- although they tend to get all the headlines."

Next: "Emotionalism is the worst thing the investor has. ... "
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