Never Sell Into a Panic

Money market mutual funds qualify as well, but you may want to choose those that only invest in Treasury securities, such as (CPFXX Quote)American Century's Capital Preservation Fund (CPFXX) (Treasuries only) or the (VMPXX Quote)Vanguard Treasury Money Market Fund (VMPXX) (80% Treasuries and some government agency bonds).

Having some "chicken money" gives you the confidence required to get through the declines.

The subprime mortgage crisis has brought this forgotten bit of investing wisdom back into focus. Short-term rates this past week took their largest one-week decline in years as investors ran for cover. At week's end, 90-day T-bills were yielding only 3.28%.

The Federal Reserve's move on Friday to cut the discount rate only confirmed that individuals and institutions were rushing to safety, forcing the Fed to act decisively to calm the credit markets.

Subprime mortgages are like pollution. A little drop of black ink in the pool will certainly spread throughout the water, and you'll never notice. But pour a bottle of ink into the water and suddenly everything turns grey. That's what's happened with subprime mortgages, as financial institutions around the world discover that their assets are polluted with mortgages made to people who are now in default.

Lenders plan for relatively few loans to go sour. That's part of their standard risk calculation. The money they make on the good loans is designed to far offset the losses on the bad.

At least that's the way it worked in the "good old days," when bank officers looked the borrowers in the eye, judged the risk and kept close watch on the payments.