Correction Worries

Reader Mel has invested $1.1 million with 45% allocated to the domestic market, 30% to the international arena and 15% to bonds and other small holdings.

Here’s a portion of his comment:

As the market heats up, I worry we may be in for a big correction. I am 70 years old and plan to retire in 3-4 years. Can you provide any advice? If you only do this for a cost, I’d like to know more about that. I manage all my Fidelity holdings. Thanks.

The important point here is not to belabor as to whether his allocations are correct for his particular circumstances, most of which are not known at this point.

Markets are so intertwined and correlated these days that many (if not all) allocation models are pretty useless anyway once the trend heads south again. Most did not learn this lesson last year, or in 2001 for that matter, so the same mistakes will be repeated.

The most important thing that Mel can do is to set up his trailing sell stops for all of his holdings so that his portfolio stays intact for the most part when the next correction materializes. With the current economic backdrop, I do not see this alleged recovery continuing forever, so a meaningful correction will be a virtual guarantee—the timing of it is the big unknown.

Anyone with any type of portfolio needs to protect himself against too much downside risk. The best way I know of is via the use of trailing sells stops. I still remember the phone calls from investors like Mel in 2001, who were desperately trying to figure out what to do “after” their $1 million portfolio was slashed in half thereby changing their retirement plans forever.

In that sense, Mel is ahead of the crowd; he realizes the tremendous downside risk and intends to take action “before” serious portfolio damage occurs. I commend him for that and hope that you are doing the same thing.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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