Market turmoil got you nervous?

Retail money market funds have gained more than $52 billion since mid-July as investors have grown more wary of the subprime credit debacle.

Chris Wloszczyna, a spokesman at the Washington, D.C.-based Investment Company Institute, says the growth in retail money market funds has been impressive ever 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 August 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

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 over-rated. 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."

Don't panic
Financial planners are on the front lines, and whenever the stock market burps they're the ones who have to deal with frazzled clients. Generally, proper allocation should limit the damage, but they have to get that across to investors.

"It's human nature to be nervous, but I tell them that this will happen periodically and they just have to take a deep breath," says Ben Tobias of Tobias Financial Advisors in Plantation, Fla. "Since the 1980s we've had so many periods of great volume and decline -- the 1987 crash, the 2000-2002 decline. And both times long-term investors were rewarded for holding on, and in relatively short order. Everybody knows stories of people who panicked and are still hurting today as a result."

Tobias advises do-it-yourself investors to develop a financial plan, write it down and stick to it.

"If you're going to shoot from the hip and allow the CNBCs of the world to influence you, then when you hear the latest expert's quickie advice, pull out the plan and see what you should be doing. Emotionalism is the worst thing the investor has. The lack of emotionalism is the biggest thing the adviser has over independent investors."

Total Money Market Fund Assets (billions of dollars)

In part, a well-allocated portfolio means having enough cash to meet expenses and enough fixed income to weather a prolonged market slump without having to sell stocks. If you feel very uncomfortable during a period of market turmoil, it may indicate your portfolio needs some tweaking to be more aligned with your tolerance for risk.

That said, if you get panicky in downturns and sell equities, or if you just want to prudently take some profits off the table, a high-yield money market fund can be a great place to park the cash. If you have a brokerage account, be sure that proceeds from a sale are swept into a high-yield fund. Many companies sweep the proceeds into a low-yielding cash account; you have to manually request a trade into the high-yield fund. Some brokerages use the high-yield fund as the default in retirement accounts, but not in taxable accounts.

Many banks also have high-yielding money market and savings accounts that will pay you a decent interest rate while you're deciding your next move.