The volatility of the September and October markets after seven months of gains inevitably left some investors wondering if it was time to “go cash” before the big correction. The S&P 500 suffered its first 5% decline in more than a year and volatility is unlikely to ease at the start of the earnings season and companies face growing earnings and pressure on margins , with rising labor and input prices and the global supply chain still chaotic. Investors are likely to have a quick trigger finger with any disappointment in the advice.

“The foam has continued, and the question is that only time will tell how long it will last,” Mary Erdoes, CEO of JP Morgan Asset & Wealth Management, said at the recent CNBC Delivering Alpha conference. “It’s just a matter of how patient investors are and with the time value of money almost nil, people should be pretty patient with what they invest in.”

History says investors find it hard to be patient and the nervousness of the market inevitably leads some investors to make the decision to sell stocks. For some, it may be prudent to reduce exposure to equities. If a person is near or in the retirement phase of their investor life where income is more important than the absolute appreciation of stocks, they may be overweight the US market today.

But for most investors with a longer time horizon – and even for investors in retirement age – the decision to go cash shouldn’t be binary between going on or out of the stock market. All the research indicates that this tends to be a bad decision. To go to cash, you have to be right twice: when you go out, and when you decide to go home. And it is the latter that often has major consequences for investors. Far too many people are reluctant to return and miss out on long periods of earnings.

The history of market corrections, bear markets, and rebounds shows that a do nothing approach tends to benefit investors more over time than a cash approach, but according to top institutional investors neither the neither is the best course of action. Research has always shown that time in the market is more important than perfect timing, but that doesn’t mean money shouldn’t move from one part of the market to another on a relative valuation basis. . Investors should always be prepared to cash in so that they can seize market opportunities rather than cutting it and running away from it. There should always be a portion of a portfolio of holdings that can be converted into cash to take advantage of market downturns and pour more money into depressed stocks.

“You never want to be a forced seller of risky assets at discounted prices due to market turbulence blocking permanent capital depreciation,” said Ashbel Williams of Delivering Alpha. Williams, who recently retired as executive director and chief investment officer for the approximately $ 200 billion portfolio on the Florida State Board of Trustees, explained that the decision to move to cash is actually a decision to rebalance stocks while they are falling.

“There always has to be liquidity when the stock markets are going down,” Williams said. “The # 1 way to protect capital is to follow investment policy and rebalance stocks while prices are depressed.”

This message was reiterated by several of the top fund managers at Delivering Alpha.

“We are very efficient in terms of cash flow and rebalancing quite a bit,” said Elizabeth Burton, director of investments for the Hawaii State Employee Retirement System. She described being “super liquidity efficient” as the most important strategy for the bottom line of the state portfolio and said there was never a period in which, as an investor, she could afford not to be in action.

Thinking about liquidity the right way takes on greater importance during times when investors’ tolerance for risk and patience are strained by market volatility, and the US stock market in particular has been showing off what investors consider “atypical” returns. Many of the top investors who spoke at Delivering Alpha expect yields on US stocks to decline in the future and are already looking for depressed opportunities in stocks around the world, including Europe and China.

“It’s not a normal time,” Erdoes said.

Investors take a variety of approaches to the short- to medium-term outlook for stocks, which makes them think. Hedging inflation risk with real assets including real estate, alternative assets including cryptocurrency, and the focus on hyper-growing companies rather than broader market gains , are among the ways in which investors make allocations in the midst of what they see as a somewhat spinning US stock market. hot.

“The easy wins from the Covid fund have certainly been made,” said Brad Gerstner, president and CEO of Altimeter Capital at Delivering Alpha. He sold travel stocks and cut his net long exposure to 50%, but he bought growth names that were beaten after a Covid surge, such as Zoom Video and Peloton.

In a traditional equity and bond portfolio, where to keep assets in a more liquid compartment so that they can be liquidated when a rebalancing opportunity arises is a greater challenge in a world of negative real rates making them more difficult. unattractive bonds.

“Negative real rates are here to stay, 74% of the Global GA has negative real rates, every US Treasury maturity has a negative real rate and the time value of money is really nothing,” said Erdoes.

Liquid assets like Treasuries, which investors can buy and sell quickly and whose value usually appreciates in times of turmoil, have historically been a good method of generating income to rebalance in equities and participate in a rebound. .

“That’s exactly what we did in March 2020, sell treasury bills… and did in 2009,” Williams said. “You still need to have something that you can go cash with to rebalance.”

Williams said his government investment asset allocation policy historically had a treasury bill compartment as high as the mid-1920s on a percentage basis and which has now fallen to just under 20%, which is still enough to meet rebalancing needs. But the state council also uses bond substitutes in a negative real rate world.

“It often means owning things… airplanes, trains, lumber, rights to music and TV shows, theaters, all things that can create cash flow, not correlated to the market,” Williams said. .

“Collectibles, if you have an edge there, like a family office, these might be a good place to sit for a while,” Burton said.

But for most investors, if they don’t have the advantage of a multi-billion institutional investor with access to both private and alternative asset classes, the best thing to do when markets are volatile. : use cash to rebalance rather than staying in cash for too long.