Volatility Strategy: Stash Some Cash

Suddenly, nervous times are here.

Those who had temporarily forgotten that markets both zig and zag just got a timely reminder. Over the past two weeks, the Dow has had a wild ride after busting through 14,000 and then sinking down to near 13,000 before perking back up in fits and starts.

Are these momentary jitters or the start of a serious slump? And where should you be putting your money?

Three top fund managers I spoke with each have their own strategies for weathering volatility. But there's some common ground. They all agree the financial turmoil isn't over. Expect a lot more turmoil in the next month or two, as the dominoes fall, they say, and that should mean great opportunities for investors who are prepared. Keep some cash ready.

Manu Daftary, of top-performing (QUAGX)Quaker Strategic Growth, said it's too early to tell whether the turmoil of the last fortnight is going to spread beyond the hedge funds and financial sector.

Daftary, whose mutual fund allows him to hold cash or even bet against the stock market, said he got nervous in mid-June as markets soared. He sold off smaller stocks and raised cash levels to 14%. He is steering clear of financials and those exposed to the discretionary consumer economy. And he predicts that home-building stocks may collapse back to the levels seen in 2000, before the housing bubble began to inflate. "They are the new dot-coms," he says.