It's classic investment advice: When markets get volatile, the worst thing you can do is panic; instead, take a deep breath and stay fully invested.
But according to two Yale researchers, that advice could be completely wrong.
"In volatile markets, there's a lot of additional risk that investors are exposed to, and if they're not being adequately compensated for that risk, then the right thing to do, actually, is to exit," Tyler Muir of the Yale School of Management said Monday on CNBC's "Trading Nation."
"That's what we find in the data," he added.
Muir and Yale assistant professor of finance Alan Moreira recently published a paper to this effect, entitled "Volatility Managed Portfolios." What they found is that contrary to the popular wisdom that the potential for higher returns makes up for higher risk in volatile markets, those who avoid investing in volatile times actually enjoy superior risk-adjusted returns.
The advice that when everything is crazy, just sit tight is based on the assumption that everything is properly priced in — but it turns out that the inverse relationship between return and risk is not static, Muir and Moreira told CNBC in a three-way phone interview.
"Our point is that if returns are not predictable by volatility," then one should vary one's investment according to volatility since this will allow the investor to "reduce your risk without forgoing returns," Moreira said.
To illustrate their point, Moreira and Muir present the following chart. The researchers compare the value of a dollar passively invested in the market to the value of a dollar invested according to their volatility-timing strategy, which diminishes market exposure in volatile times and increases it in calm times. On the whole, that makes one's average market exposure 100 percent, just like in the buy-and-hold strategy.