Ask Colin

What do you do if a correction in the market seems imminent?

I have a two-pronged approach to this situation.

The first applies to bull market corrections when there is no sign of rampant speculation and is the most important aspect to my approach: to have a clear sell-stop level marked on the charts of every stock that I hold. Regularly, I carefully review every holding and mark its sell-stop on the chart. This makes the decision, so if a bar appears that cuts the sell-stop line, I can execute a sell order without the need for any emotion or agonising.

If I am expecting a sharp fall, I may monitor the market during the day and execute my sell-stop then. However, I am essentially and end-of-day investor and would usually execute my sell order after the opening of the market next day.

The second is to apply my market exposure strategy when rampant speculation has become evident. The idea here is simple. When risk is low at the start and in the middle stages of a bull market, I will have my portfolio fully invested. Then, as I detect that we are possibly in the rampant speculation phase, I cut my exposure back. For example, as the sharp US correction began in the week ended 12 May 2006, I was sitting at about 80% in stocks and 20% in cash. This exposure to stocks is a little on the high side for my strategy, but all my holdings are still in strong uptrends.

There is one other minor aspect of my investment plan. That is to take profits if a stock has doubled in price.

All of these aspects of my investment plan are fully described in my book Building Wealth in the Stock Market.

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