If you still hold stocks, should you use the recent plunge to buy? Should you hold? or Should you just get out of stocks altogether? The answer depends on how soon you need your money and your outlook for stock prices. The first question is easier to answer than the second one -- which is virtually impossible to get right. As I posted last October, if you need your money in the next six years, it probably makes sense to sell.

How bad was January 2009? After falling 38.5% in 2009, the S&P 500 lost another 8.6% of its value last month. And the January barometer effect -- the idea that as goes January, so goes the year -- has a pretty good track record. In 60 of the last 80 years, the S&P 500's performance in January has reflected the index's annual result. For example, in January 2008, the S&P 500 fell 6%. And this January was the worst ever for the market. So maybe 2009 will be even worse than 2008.

Let's look at what is happening in money market funds. In prior years, when the stock market was booming, investors rarely thought about putting their money in money market funds. Now, with the market in shambles, people are flocking to money market funds like never before. In the six months ending this November, $550 billion were deposited in money market funds. In total, these funds manage an astounding $3.5 trillion.

Enter the Federal Reserve and near zero interest rates. What's happened as a result of this move? Some larger funds are shutting their doors, complaining that they can't make money any longer. Some are charging fees to hold your money. Vanguard stopped opening new accounts or accepting additional investments in Vanguard Treasury Money Market and Admiral Treasury Money Market funds from financial advisers, intermediaries or institutions (including IFAs), although existing Vanguard contribution clients may continue to invest in the funds.

Credit Suisse, meanwhile, said it will quit managing money market funds in the U.S. Yields on these funds average 0.34%, while some funds yield nothing.

Investors will increasingly be looking at alternatives for their money. Let's hope some of this cash moves back into the stock market.

So spooked by the market that you've withdrawn cash from your investments to stuff beneath your mattress? Or do you simply crumple every mutual fund statement without opening?

Yesterday as I sipped my coffee, Payson Swaffield, vice president and chief income investment officer of Eaton Vance of Eaton Vance (NYSE: EV) in Boston, shared with me by phone some current alternatives in fixed-income investments. There are two worlds of fixed-income investments (bonds, essentially), according to Swaffield. One is very low risk and low return. The other is slightly higher risk but has equity-like return possibilities.

First some definitions: A fixed-income instrument is an investment in a bond or another debt security issued by a government or government agency, such as Fannie Mae or Freddie Mac, a municipality, or a private enterprise. Fixed-income investments have traditionally provided lower volatility than equity investments as well as risk diversification, Swaffield says.

It was once said of Joe DiMaggio, The Yankee Clipper, that he was so solitary and shy off the field that 'he led the league in room service.'

Well, the U.S. Federal Reserve 'leads the league in creating facilities.' The Fed Tuesday said it will help finance the purchase of assets from money-market mutual funds hurt by redemptions from investors fleeing to safer investments, such as U.S. government bonds.

Fed focuses on money market liquidity

The Fed has created a Money Market Investor Funding Facility (MMIFF), "which will support a private-sector initiative designed to provide liquidity to U.S. money market investors," the Fed announced Tuesday.

Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less, the Fed said. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.

JP Morgan Chase (NYSE: JPM) will administer the five special units that will buy certificates of deposit, bank notes, and commercial paper with a remaining maturity of 90 days or less, Bloomberg News reported Tuesday. The Fed will make up to $540 billion available for purchases.

Economist David H. Wang told BloggingStocks Tuesday this latest facility "should further increase liquidity."

Investors are scared. The value of their portfolios has plummeted. Now many are seeking safety instead of returns.

If you are one of those investors, you need to understand the different levels of security in the options available to protect you.

But first, ask whether capital preservation is really the right goal for you.

If you anticipate needing 20% or more of your assets within a five year period, you should not have any exposure to the stock market. You need the confidence of knowing your money will be there when you need it. You cannot afford the kind of market volatility we are experiencing that could cause you to sell at a loss to pay living expenses.

You have a number of choices outside the stock market. As with all investments, you are rewarded for taking risk. Remember: The most secure choices will pay the lowest interest.

The liquidity crunch is having unprecedented ramifications in markets that were traditionally regarded as very safe. Many financial experts now regard only cash and debt secured by the full faith and credit of the U.S. government as really safe.

Over the last quarter $100 billion has left equity funds. The FT says that data from Emerging Portfolio Fund Research shows that "investors pulled $70bn from US, Japan and Western Europe funds during the quarter." Some of that money went into funds which invest in emerging markets and a great deal of it went into safe money market funds.

The data means that many mutual fund companies will post bad first quarter figures, but the news is much more serious than that. Such a large amount leaving these funds means that stocks are being sold to provide the capital for redemptions. The process sets up a bad cycle. Stocks are sold to provide money to go into other assets. The sale of stocks continues to push equity indexes down. This leads to more withdrawals.

The only positive aspect to the news is that there is now hundreds of billions of dollars in money market funds, most of it very liquid. If the markets do begin to recover due to better news on earnings or a perceived end to problems in the financial sector, there is a great deal of "dry powder" to be put back in the market. That could further accelerate a market recovery.

But, if withdrawals from equity funds continues, that could be a long way off.

Douglas A. McIntyre is an editor at 247wallst.com.

Earlier in the week I talked about action some money market funds were having to take to protect their value and avoid having to "break the buck" thanks to the problems in the mortgage market. The Wall Street Journal reports today that the number of money market funds admitting to trouble is increasing {subscription required]. Today's story focuses on FAF Advisors, a unit of U.S. Bancorp (NYSE: USB) , which operates the First American Prime Obligations Fund. This fund posted a notice on its website that alerts its investors to the fact that the fund "entered into an agreement that provides that if a loss is realized on the notes issued by Cheyne Finance LLC, an affiliate of FAF Advisors will contribute capital to the fund, up to the amount of the loss, in an amount necessary to preserve the fund's price at $1.00 per share and to preserve the fund's AAA rating."

Cheyne Finance LLC is an SIV that went into receivership, so that's the one most are focusing on publicly, but as I've discussed before many money market funds hold assets from other SIVs in trouble. Five other fund groups that have moved to protect their funds or developed a plan under agreement with the SEC include Bank of America's (NYSE: BAC) Columbia Management Group, Credit Suisse Asset Management,. Wachovia's (NYSE: WB) Evergreen Investments, SEI Investments Co. and STI Classic Funds. Other funds that held Cheyne-related assets in recent SEC filings include Valic II Company fund, offered by a unit of American International Group, and RiverSource Cash Management fund.

Yesterday I wrote about mutual funds at risk because of the mortgage mess. In response one of my readers (thanks Gary!) alerted me to an article in Fortune talking about how the safest of investment vehicles -- money market funds - are caught up in the SIV problem. Again Bank of America (NYSE: BAC) comes to the top of the pack as hosting some of the riskiest investments for its investors through Columbia Cash Reserves Fund. Fortune reported that as of Oct. 12 this fund has about $640 million in Cheyene Finance, an SIV in trouble.

When I took a look at its most recent report to shareholders (Feb. 28,2007), I found Columbia Cash Reserves Fund had five of the biggest SIVs in its portfolio including Cullinan (HSBC Bank), K2 (Dresdner), Sigma (Gordian Knot), Links Finance (Bank of Montreal) and Sedna (Citibank International). In addition to these five, the other major SIVs are Centauri, Beta Finance and Five Finance -- all managed by Citibank (NYSE: C) - Tango Finance managed by Rabobank International and Victoria Finance managed by Ceres Capital Partners.

Money market assets have reached a record $2.65 trillion in the United States according to a recent Bloomberg article. Clearly attributable to remarkably pessimistic sentiment amongst nearly all market participants, investors are looking for shelter and safety in this incredibly volatile market.

The article goes on to cover the higher-risk 'money market' funds of today that are involved in much riskier asset classes such as subprime credit. This is a topic that my colleague Peter Cohan discussed yesterday and its an important concept to remember -- not all money market funds are created equal.

Every day new pieces of news hit the wires to confirm the 'we are scared' thesis. The volatility index (VIX) is at all-time highs, investors are pulling their money from the stock market and moving into money market funds, the markets are giving back much of their early year gains.

Before you take all of your money out of the market make sure you understand why you're panicking. Are you afraid that your holdings have exposure to a weakening credit market and tough borrowing environment? Are your holdings pricing in a rebound in housing to occur shortly? Then it makes sense to sell. But if you own long-term investments in stocks that you consider to be attractively priced don't let the panic overtake you.