To a large degree, lots of small investors have fled the broader markets, and for better or worse, many have chosen the perceived safe haven of the largest money market funds. Market savvy investors seldom travel in big groups, and when your supermarket grocery-bagger talks about the wisdom of moving into money market funds, something seems wrong.

The real issue is that risk-averse investors have stopped paying attention to proper investment diversification. When small investors grow tired of seeing losses, they’ve given up hope and dumped their balances into large money market funds.

The money market fund managers readily acknowledge the problem: Patricia Larkin, a CIO for BNY Mellon, when asked about her biggest challenge, responded: “I think it would really be capacity issues. Twenty five years ago, we had a lot more banks that issued hundreds of millions of dollars in CDs every day. In the commercial paper space over the last two years, there has been tremendous consolidation and less issuance. It's been more and more difficult to find corporate issuance day to day. The asset-backed market has shrunk considerably the last two years."

During the global financial crisis of 2008, fund managers began to flee the commercial paper market, mostly due to concerns about the quality of the debt. In the run and its aftermath, the commercial paper market almost collapsed, was propped up by a 50 billion dollar temporary fund, and eventually re-emerged as a smaller, consolidated creature. Now, there is more demand than ever for these short term instruments, but less avenues of opportunity.

This is an avenue for trouble. Liquidity must be an issue that keeps these managers up at night. The constant inflow of large amounts of cash is forcing these managers to look under every rock they can find. With investor fear at its current level, another run on bond values might prove to be even more severe than 2008. And how does this risk pay off? Keep in mind that a really great return on the best rated money market funds is 1%. After taxes and fees, it seems that buying treasuries directly isn’t such a bad idea.

Diversify your portfolio correctly. Decide on a mix that includes investing in stocks, bonds and cash that fit your investment needs, and stick with it. Investing in silver should not be ignored. Remember that the mutual investment shares you buy in the tough times by buying low are the shares that give you bigger returns in the future. Risk is part of the game, even at the largest money market funds.