Following up on last week’s thought experiment about the components of a good trader (we’ll get to Part 2 of that one later), here’s another thought experiment about that most exciting of topics, portfolio management.

Two asset managers walk into a bar. You’re sitting there, nursing your dram of single malt, thinking about the raging bear market and the deep recession (this takes place in the near future, perhaps). Then, the managers both approach you and ask if you’d like one of them to manage your money. You decide to humor them and listen to their pitches:

Manager #1: I will put you in the best positions I can find, come rain or come shine. I’ll trade as much and as often as I need to to make you money, and no matter what happens I will always keep you allocated in whatever trades seem right to me. I will charge you a fee of 1% of assets under management.

Manager #2: I will take your capital and put it in cash for the foreseeable future. I will charge you a fee of 3% of assets under management.

Who do you choose? Well, you want to give manager #1 a chance, and kick manager #2 in the shins. And that’s completely understandable, because, as you no doubt shout after #2 as he’s limping out of the bar, “I can leave my capital in cash easily enough, without any help from you!” But that’s the thing: if you’re a regular human like the rest of us, it’s actually kind of tough to move to cash and stay in cash at any given time.

But cash is a position, too. Sure, it’s completely vulnerable to inflation, but so are most things. And it’s absolutely invincible against sudden selloffs, against bad earnings, against sudden political turmoil, and against the steady water torture of a broad market decline. While it’s not necessarily a good idea to ever be completely on the sidelines, sometimes when you just can’t find a trade you like, that’s because the best trade is no trade.

And what about those money managers? Well let’s imagine you split your capital and give half to each of them, for one year. The market falls by 13% that year. If manager #1 is like the majority of fund and asset managers, i.e. unless he’s a real gem of a trader, he’ll do well just to track the market that year. But let’s give him a few percentage points, for argument’s sake. After his reasonable fees, you’re still down 11%. And manager #2? Even though he charged you an absolutely criminal amount in fees (for what he’s doing), you’re still down only 3%, which beats the market quite soundly.

True, this is a slightly silly example, but it’s certainly not absurd or implausible. Obviously, guy #2 is your worst enemy during a strong bull market. But the point here is that keeping your powder dry when things are uncertain is often the only way to be sure that you’ll still be around when the next bull cycle hits. We’ve taken a little flak recently for lightening up on our positions, and that’s fine. But on the other hand, knowing when to lighten up and keep some extra cash on hand has to be one of the most underappreciated and underutilized skills in this business.