Correction or crash?

The fall in global stock markets last week has worried me greatly as I invested into China, Latin America and an American technology fund in December. I have seen all my profits (and more) wiped out over only two days. Should I cut my losses and sell, or sit tight and wait for the long term?

It cannot really be seen as any great surprise that the China steam train stopped its relentless move forward last week, since we have seen stock market growth of over 100 per cent in the past 12 months. You cannot expect any emerging market to go up and up without corrections from time to time. You may recall the events of last May when emerging markets suffered a large correction, only for a healthy rebound shortly after. Long-term investors in China should not worry unnecessarily. I stress long-term as you must view any investment into emerging markets such as China as volatile and must be long term due to short-term volatility that will inevitably happen.

The same should apply to your investments in Latin America and technology. Short-term fluctuations should be ignored, so long as the fundamental reasons for investing in these sectors remain robust.

That said, if you feel that you cannot accept such short-term volatility, then you should come out of the respective investments. In fact, you should not have invested in them in the first place. I do not suggest you sell now with a view of re-entering the market at a lower position unless you are able to trade quickly. For example, if it takes your adviser five days to place a trade, then do not attempt to try and time the market.

If, on the other hand, for example, you place an order on the Monday and it is executed at Monday's prices then market timing is possible. I am however generally against this principle as market timing accounts for only a very small proportion of one's overall investment return.

The most successful investor focuses more on asset allocation. What I mean by this is how much you should have invested in equities/bonds/ cash/commodities, etc. If you get the asset allocation right, then the best returns will be made. The timing of when to buy or sell becomes very secondary. I expect the present volatility to continue into next week and see last week as an opportunity to enter emerging markets (if you are not already in). Mining stocks, especially, are trading on very low PE ratios and the long-term investor should seriously consider commodity equity funds at such cheap prices.

The shrewd investor sees stock market corrections as an opportunity to buy - not to sell. This is so long as you have an investment time horizon of years and not weeks!

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com

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