Do you need to be fully invested at all times?

Years ago, one of my financial advisors placed me in an equity mutual fund which was 85% cash. I had questioned her about the approach the fund manager was taking because he only had 3 holdings whereas other mutual funds had 30-40 if not 100 stocks. She assured me that he was an outstanding investor and knew exactly what he was doing.  I again questioned about his technique because it seemed he was more lazy than prudent. Nevertheless, I invested in May of that year given my strong relationship with my advisor and great advice she had always given me and does so to this day!

All through June, the fund manager did not buy any stocks because he felt they were all overvalued. Then in July, he finally bought a 4th stock to add to his portfolio. At this time, many investors were fed up with his approach and had bailed out but I decided to stay with him because at least he had not lost any money.

Then the unpredictable happened in September of that year. Two planes crashed into the World Trade Center in New York and the rest is history. The fund manager had 300 million dollars sitting in cash and when the markets eventually opened up, he was able to purchase securities at discounted prices because he had followed his disciplined systematic approach to investing. The AIC American Focused Fund managed by Larry Sarbit made a 5 or 6% gain on the year which was far better than the 20-30% losses of other comparable investments.

Another great example is that if you had invested in the NASDAQ Composite back in March 2000 when it was at approximately 5000 points, you would still have lost more than 10% of your money since that time using a buy and hold strategy. This would have greatly underperformed holding your money in cash over the past 14 years!

The point I wish to make is that it is OK to be in cash if you are unsure what to do. Being fully invested means someone is making a commission when you part with all of your money.