If you're like most people, you probably have a larger percentage of your investment money in cash than you had two years ago. While some investors are taking their chances in this recent market volatility, many are choosing to wait on the sidelines until the "All Clear!" call comes in (whenever and however that's really communicated -- but that's another blog post).

Well, these investors sitting on cash are not alone. Bloomberg reports this morning that mutual funds have been desperately selling stocks and moving to pretty sizable cash hordes. In a survey conducted by Merrill Lynch and reported by Bloomberg, managers have been feverishly adding to their cash positions and consequently, "cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions."

This brings up a couple of issues. Let's be clear: mutual fund managers want to manage volatility like all investors. The problem here is that if I hand my money over to a small cap manager because I believe he's pretty proficient in picking stocks, I don't really want him moving into cash. That's my job as portfolio manager of my own investment account. I'm essentially paying him to be in the market -- not move out of it.

This is perhaps the reason why investors who use index funds to achieve diversification and exposure to different elements of the market will ultimately be served better. When the market does turn around (when this occurs is the trillion dollar question), these funds, by their mandate, will need to plow this money back into the markets, buying up stocks at a time that their valuations tend to go up -- actually the opposite of what patient investors should do in the long term.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.