I was eating a salad at lunch with an economist from one of the big money-management firms a few weeks ago when he told me he was putting his new money into cash instead of buying stocks.
I told him I was doing the same.
We aren't liquidating mutual funds, bonds or equities and putting them in cash. We are putting the money we currently are saving from salaries — "new money" — into money markets, savings accounts or the equivalent.
It's hedging — putting money aside for the inevitable market downturn so we can buy mutual funds at lower prices when the market drops.
Markets always turn down.
The question is on every investor's lips, these days. Turn on CNBC, and you hear everyone and his brother talking about whether the market still has legs.
Is it too late to jump in? Are stocks too expensive? Can stocks keep moving upward for another five years, as one analyst said earlier this month? When is the crash? What will survive? What won't? Where should I put my money?
Those questions are getting thrown around every day.
The accompanying chart came from data provided by the Independent Adviser for Vanguard Investors, a monthly newsletter to which I subscribe. Like many of us, I own Vanguard mutual funds.
Jeffrey DeMaso, the publication's director of research, put together this 10-year history of Vanguard's U.S. stock funds to see how specific funds "capture" upside gains among Standard & Poor's 500 largest U.S. stocks and how well the same funds do when the S&P declines.
An upside capture of greater than 100 percent tells you the fund did better than the index during up months, DeMaso said. A downside capture greater than 100 percent means a fund lost more money than the index during those months. A 99 percent or less means the fund held up during the downturn.
The question I am asking for this column is: Should you stay in passively managed index funds and take your mauling like a man when the S&P hits the skids? Or can you stock-pick your way out of it through actively managed funds?
"This speaks to the active/passive debate that goes on in the industry," DeMaso said. The current trend, long championed by Vanguard founder Jack Bogle, is buy low-cost index mutual funds and blindly ride the roller coaster. The counter argument is that some money managers can grab upside and limit downside.
"One way to look at this list is to look at active managers that have outpaced the market," DeMaso said. "You can find some that have done well on both the up and down sides." Those include Vanguard Health Care and its PrimeCap funds and Capital Opportunity. (I own all three.)
The chart goes back 10 years and includes a few down cycles, as well as the Great Recession of 2007-2009, during which the S&P 500 lost 50 percent of its value.
Lists like this are useful and fun to read. They should be part of your investment calculus, but remember: They don't predict the future.
"If you look at past performance, it tells you exactly how you should have invested this past 10 years, period," Washington investment manager Michael Farr said. "It doesn't tell you how to invest in the next 10 years, because you never get two down cycles that look exactly the same."
Farr said there are several reasons some stocks did well and others performed poorly during the last downturn, which was driven by a financial crisis caused by bad bank investments. The 2001 stock drop was triggered by the 9/11 attacks.
Stocks ranging from health care to energy to banks fare differently based on what is causing the downturn. The 2000 bust was due to the burst of the dot-com bubble.
"If you are going to study past performance, you have to study past conditions," Farr said. "The down market capture data has been based on the past 10 years, and that was a very specific down market that included a banking and financial crisis. The next downturn will probably be based on something else."
Russ Kinnel, director of manager research at Morningstar, said it's possible to minimize downward exposure.
High-quality funds such as Jensen and Dreyfus Appreciation hold large-cap, blue-chip stocks such as Pepsi, Procter & Gamble, Coca-Cola, IBM and Pfizer, which continue to make money in down markets and have strong balance sheets.
"In 2008, balance sheets had a big determination on how much stocks fell," Kinnel said. "High-quality companies didn't start losing money."
In the 2000 dot-com crash, "the stuff that got hurt the most were tech names trading at very high valuations. People thought they were going to keep growing the way they did. Cisco, Oracle and Amazon got crushed."
Value funds that lean heavily toward financial stocks were already at low prices during the tech bubble in the late 1990s, so they fell less when the bubble popped, Kinnel said. But those funds took a beating during the financial crisis.
"You can find active funds that do well and are going to lose less in down markets," Kinnel said, "but you have to find the right ones."