Strategies to save portfolio during major stock market correction

The term “save” indicates generating 5%-10% positive return from overall portfolio while market corrected by more than 50%. You can’t expect 20%-30% return while market corrects by 50%+. Even marginal positive return will be great during those situation. You need to take the following steps  during major stock market crash –

  1. You need to sell-off your entire portfolio much before such stock market crash and seat  in cash. Keeping huge cash in hand is another painful experience. For example, as per economic indicators and market data, one should sold-off his entire equity portfolio during October,2007. However from October,2007 to January,2008 bull run continued. Post January,2008 market crashed. Now, if some one sold-off his entire holding during Oct,07 he had to witness another 10%-15% up move before crash. Many investors can’t tolerate the same.For example, recently we put partial profit booking call in one of our old recommendation, Caplin Point Lab at around 1000-1050 due to over-valuation. After that the stock moved till 1350 level and now again come back around 950. We recommended to buy it at 150 during March,2014 and again around 450 level during September,2014. Surprisingly few of our members those purchased at 150 or 450 are not still happy selling at 1000 because after that the stock moved till 1350. The point is you can’t exit at top. You need to exit as per rationale. After that market may move up further but sooner or later it will come down.
  2. You need to keep huge cash in hand for 3-4 months or more. A part of that cash can be utilized in few other asset classes. Depending upon the situation you need to re-start investing in selected stocks. A thumb rule is don’t invest in previous bull market stocks. Like real estate (DLF,Unitech) and infra related stocks gained the most during 2007 bull run. Post 2008 crash, one should avoid investing on those sectors or the stocks that lead the previous bull run.
  3. During the middle of the bull run (like current scenario) you need to start tweaking your asset allocation.
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