Mutual Funds

The last time I felt like this was in October, 2008 when I started asking myself if it was time to move everything from mutual funds into money market funds. That time, I didn't act and have regretted it ever since.

Last month (March 2010), funds lost about 5.5% of value. Sometimes you say to yourself, "It is just a blip; things will come back." But there is nothing to base that kind of optimism on. Europe is a mess. The oil spill in the Gulf of Mexico is unabated. More than anything else, there is a feeling of angst.

So, I pulled the plug and moved everything out of a stock-based mutual fund into either a money market fund or a bond fund. I made my trade at the end of March and, based on how mutual funds operate, the trade occurred on June 1. I was out of town attending a conference this past week, so I haven't really assessed my current status.

Reading Reuters and the NY Times suggests I am not alone in heading for the exits at this point in time.

The only remaining question I have is about the potential for another point of catastrophe like the one that happened back in 2008. I am using my understanding of Catastrophe Theory on this: a sudden, non-linear, irreversible change precipitated by an incremental shift. Last time, the plunge was precipitated by home mortgage defaults. (I've recently read Michael Lewis' The Big Short.) I'm not sure what may precipitate the next slide over the cusp; but there are a host of possibilities, including the fact that the causes underlying the first crash weren't really resolved and an economic equilibrium was never actually achieved. So, in addition to the new economic problems that have emerged in Europe, the older problems persist.

I imagined this past week thinking that I really need to understand how seemingly unrelated events actually work as cascading catastrophes. For example, the problem with the PIGS (Portugal, Ireland, Greece, and Spain) economies has nothing directly to do with either the volcano in Iceland or the oil spill in the Gulf. Similarly, the stock market crash apparently had nothing directly to do with the runs on the banks that followed a year later or the dust storms of the years that followed that. But somehow, these unrelated events do add up to instigate catastrophe events.