The market continues to act very poorly today and is stirring up some level of fear. The S&P 500 has not yet tested the lows that were hit last week but it looks likely at this point. There are few signs of support and little dip-buying interest.
In this sort of market, it becomes extremely important to be clear about your investing or trading style. When stocks are trending up, style doesn't mean as much because the best course of action for everyone is to stay long. In a market that is correcting, there are some major variations in style that have to be considered.
Fund manager Dan Niles was just on CNBC and mentioned holding a 'high' cash level of 12%. For a long-only fund manager that may be a high level of cash. By contrast, my cash level is now around 75%. My style is very different as I cut losers quickly and have no interest in holding positions through a market correction.
The easiest way to get in trouble is to not be clear about how you are going to deal with a difficult market. Are you going to hold on to core positions that might fall 20%, 30% or more? Or are you going to make quick exits and look for re-entry at a later point?
If you aren't clear there is a great risk that you react emotionally and sell or buy at the wrong time. I know what my style is and what I'm going to do. I'm not going to change my mind and allow some short term trade to turn into a long term buy and hold or vice versa.
Clarity of style is paramount if you are going to effectively navigate a poor market. Without a clear style, you can't develop strategies or tactics. Make sure you are clear about what you want to do.
