This asset manager tells you how to prepare for a market correction

  • Investment strategy should focus on the quality of the companies.
  • Some analysts wonder whether stocks have reached their growth peak, after a recent sell-off in tech companies.
Not convinced this is the start of a raging bull market: Reality Shares
Not convinced this is the start of a raging bull market: Reality Shares   

The best way to prepare for a market correction is by putting money on companies that can deliver growth, one asset manager told CNBC, as talk of a potential stock market crash grows.

In this scenario, investment strategy should focus on the quality of the companies, Eric Ervin, chief executive officer of Reality Shares — an investment platform — told CNBC Wednesday morning.

"Trim the junk out of your portfolio and hold on to that high-quality growth component of the portfolio," he said.

"These are the companies that are going to be the healthiest in a portfolio managers' decision tree when we do get a correction; these are the last companies to be sold. You'll want to sell the low-quality companies first and then keep the high-quality companies," Ervin told CNBC.

Spencer Platt | Getty Images

Ervin's comments come as analysts wonder whether stocks have reached their growth peak, after a recent sell-off in tech companies. They are worried that new regulation in the tech sector will limit their profits. At the same time, they are also concerned about the impact of higher interest rates on companies' balance sheets as well as a potential trade war between China and the U.S.

The U.K. FTSE 100 and the German DAX are both down by around 8 percent year-to date amid a wider slump in global markets. The decline has prompted analysts to start questioning whether this is the start of a prolonged shock in markets.

Robin Griffiths, global macro team chief technical strategist at U.K.-based currency investment firm ECU Group, told CNBC Tuesday that "death crosses" had been reached — where markets fall below their long-term trend line, which is then itself crossed by its short-term trend line — meaning that some markets are already entering a sustained period of falling prices.

"If you've seen a dead cross you've probably seen a bull market and you're now in a bear," he said. "Some (markets) have formed dead crosses and the message from the charts are the U.K. and core Europe have formed dead crosses and there's a very high probability they are now in a bear market."