With all of the headwinds swirling around stocks today, many investors are seeking the safety of cash. It's a wise move, but not for the reasons you may think. Cash is not just "safe," but it is also firepower for the next major upward move in the stock market. Right now, the market is tumbling, but it's crucial for you to be in a position to jump into the market when a bottom has come in. You'll know it's there when the market is no longer plunging (or occasionally surging) and instead is trading in a tighter range.
So if you don't have cash on hand right now, where do you find it? Among your portfolio's best performers.
It may seem counterintuitive to part with your most impressive stock picks right now, but you need to know two things. First, they may eventually succumb to the current weak stock market, and their likely higher-than-normal price-to-earnings (P/E) ratios means they could fall by a hefty amount. Second, the losers in your portfolio are just as often a victim of poor market sentiment, and can often be oversold in these times of distress.
With that in mind, I've compiled a list of 2012's top-performing stocks in the S&P 500 and S&P 400 (which is comprised of mid-cap stocks). Every one is up at least 25% since the year began, and all sport a forward multiple that is at least 50% higher than the market average (based on both 2012 and 2013 earnings forecasts).
I got a chance to dig into this group, and have drawn a clear conclusion. These stocks have mostly moved up for justifiable reasons and don't necessarily make good short candidates. But in many instances, it's simply hard to see any further upside from here. So converting them into cash right now makes ample sense -- especially if you think the market may slip further from here.