A 15% correction? One expert's advice for a sinking ASX 200

Is it happening? What do we do now? Here's one professional's take on what you should do with your portfolio.

One investment expert has warned the market is in "sell mode", and that investors should act accordingly.

The S&P/ASX 200 Index (ASX: XJO) was hammered on Friday, sinking 2% for the day. That means it has lost an eye-watering 4% over the past month.

Fairmont Equities managing director Michael Gable forecasts that this is the start of a 10% to 15% correction.

"The market is in 'sell' mode. I am not one of those bearish analysts that have predicted 50 of the last 2 corrections. I have been bullish for quite a while now," he said in a memo to clients on Friday. 

"However, now, finally, I am more defensive."

A business man wearing a life jacket prepares to jump off a sinking boat

Image source: Getty Images

Stop buying and free up some cash

Gable 3 weeks ago stopped buying and started to increase the cash position for his clients.

And the past several days have convinced him that that was the right move.

"Price action in the last few days is indicating that the pace of selling should now pick up," he said. 

"Only once this is over do I believe it will be time to start buying again. In times like this, I like to have some cash ready on the sidelines."

He added that it was legitimate to just hold on and ride out the correction, but being proactive in a sinking market can enhance the portfolio.

"The most effective way to try and outperform the market is to raise cash levels on the way down and then buy back in later," said Gable.

"The market takes the lift down and the stairs on the way back up. This means that it makes sense that doing something different in a falling market is much more powerful than doing something different in a 'steady as she goes' rising market."

Then buy up the bargains when the carnage stops

According to Gable, after the correction is done, there are plenty of reasons for the ASX 200 to rally once again.

So he's looking forward to buying up some shares at bargain-basement prices once the market has turned around "in a few weeks or so from now".

"I advised my clients to sell certain stocks and get defensive. Not many advisers are good at selling. Those of you who received advice during the GFC know this too well," he said.

"We've had a great run off the COVID lows but it is going to be harder from here to make a return. You need to be a little active. Buying stocks is only half of it. Knowing when to sell is the bit that makes the difference."

Shaw and Partners senior investment adviser Adam Dawes told The Motley Fool last week that he also likes to keep some cash aside for times such as this.

"We always like to keep at least 10% of clients' money in the bank for opportunities — or using a broker expression, 'Keeping your powder dry'."

But he did warn of psychological damage if one decides to sell to free up capital when the market is falling.

"If you sell, then most clients don't get back in as they are paralysed with fear as markets continue to recover," he said.

"It is not wise to sell as markets always come back. March 2020 it came back within 6 months and GFC took a little longer."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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