How to prepare a correction

First we need to define a correction: It is a temporary dip (about 5 to 20% down) but not a recession that would drag on longer and would lose more than 25% in the first year. Every one’s preparation is different. Basically you want to accumulate cash now by selling stocks before the correction and pick up stocks during and after the correction.

What should be done preparing before a correction? I summarized here what I did in my 5/19/2011 blog. It worked that time, but there is no guarantee it will work again in the future. However, what I did is a good list to prepare for a correction.

1.       Accumulated cash.

I halted buying any stock and had been selling stocks for several weeks since 5/19/2011.

2.       Prepared the buy list when the correction was almost over:

2.1    The good (from my previous analyses) stocks that performed reasonably well but would be down due to the correction

2.2     The stocks that had performed very well recently even they're not classified as good stocks in my analyses.

2.3    Stocks in my previous buy list that had lost a lot of value - very careful here as the bad stocks could go to 0. Ensured they had a good chance to recover.

2.4    If you cannot find enough stocks to buy, try ETFs like SPY.

2.5    Screened some deeply-valued stocks for bottom fishing.            

My logic is that if the stocks have performed well and they plunge due to the correction, they will climb back after the correction.

3.       Bought contra ETFs and stocks at reasonable discounts.

I usually place buy orders 3% less than the market prices if I assume the correction is 3%. If your buy prices are too far away from the market prices, most likely your buy orders will not be executed or you buy some stocks that the fundamentals have been worsened.

4.       Sold covered calls for some stocks I already owned. Not all stocks are good candidates for covered calls (Chapter 64).

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(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.