As the Federal Reserve was slashing interest rates in recent weeks, billions of dollars in investor money was flowing into some of the most rate-sensitive investments out there, into funds that are almost certain to have a tough time keeping up with inflation.
The flight to safety is, for many people, seen as a way to minimize risk.
In fact, it is just turning from one form of risk to another and, given current market conditions, puts savers in a situation most will hate.
Money-market mutual fund assets now stand at a record of $3.27 trillion, according to Money Fund Report, a service of iMoneyNet of Westborough, Mass. In the week after the Fed's first rate cut, about $57 billion moved into money funds, and recent trends are showing no signs of slowing.
That money has hardly gotten attractive rates. Money Fund Report shows the average money-market fund to have a current yield of 3.17 percent; competitor Crane Data shows the average rate on the 100 largest money funds to be at 3.66 percent.
No matter how you slice it, money-fund rates are falling, still reacting to the Fed's big two-step. Officials at both of those research firms suggest that by the time current adjustments are complete, the average money fund will yield about 2.5 percent.
With inflation standing at 4.1 percent, as measured by the Consumer Price Index in 2007, that's a problem.
Risk comes in many different forms, but the one that many people are most fearful of is market or principal risk, the chance of losing their money in the stock market.
If someone pulls out of the market and goes entirely into a haven like a money-market fund, they zero the principal risk, but they give a big hug to purchasing-power risk, which is the possibility that their money will not grow at a rate that keeps up with inflation.
With money market funds yielding less than the inflation rate, investors who blithely took on purchasing-power risk are now on the wrong end of it.
"People move to money-market mutual funds for safety and for preservation of capital," says Peter G. Crane of Crane Data. "If some of that gets eroded by inflation for a time, that's disappointing, but not necessarily worth changing strategies for. The damage from trailing inflation for a while pales in comparison to simply losing 20 percent because you held the wrong stock."
Being on the wrong side of the inflation risk is a minor problem if it doesn't last too long. But many investors pay little or no attention to how they invest their cash, thinking they will park the money while they wait for the next opportunity and not worrying about the payout on that cash.
Over time, however, that money tends to get sticky and stay where it has been left, without much regard to the payout. (How else can an investor explain leaving money in a low-paying brokerage sweep account indefinitely, when they could direct the cash into something better?)
"The problem isn't someone parking their cash for a little while; it's for the person who is running from market risk and who thinks they are getting a risk-free return in money markets," says Connie Bugbee, managing editor at iMoneyNet. "You need to understand what you are doing and to have a plan for the money."
In general, experts suggest, that plan is not about stretching for every available ounce of yield. Money-market funds are built to be ultra-safe investments, but they are also the one part of the fund world where chasing performance is acceptable; going for funds that top the performance charts is a good way to get the best, most competitive yields.
The investor who then stretches further for yields - abandoning money funds - winds up taking on other risks and might allow principal risk to creep back into the picture. That's not horrible: It just paints a picture of why investors need to embrace a variety of asset classes and take on a range of risk types.
Says Crane: "The phrase `Don't fight the Fed' applies to cash, too, where money market investors have to take what the Fed is giving. Right now, that means accepting inflation and low yields, which is not fun. But the big mistakes come when people get greedy, when someone fighting to preserve a yield of 5 percent takes risks far beyond the money market and blows up.
"It's OK to play it safe, if that's your plan. Better to do that, than to stretch for yield and to get run over by a bus while you are picking up the pennies."
Charles Jaffe is senior columnist for MarketWatch and the host of Your Money Radio (www.yourmoneyradio.com). His postal address is: Box 70, Cohasset, MA 02025-0070.