When the market starts to go down, we're not sure how far down it will go. To protect our portfolio and reduce our downside risk from events like bubble burst of March 2000, we incrementally reduce market exposure by selling our weak and/or risky positions. A weak position is one that underperformed the up phase of the market and also deteriorated during the down phase of the market (LVOCX). A risky position is one that has dropped too fast from its peak or has the potential to drop fast if the market continues in a downturn (OBCHX, ICF).

Reducing market exposure generates cash. Therefore, we will have a tendency to under perform the broad indexes as the market recovers. As we redeploy our cash into funds with high alpha, we will tend to catch up to the indexes and surpass them as our equity exposure increases.