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Investing In Tough Markets
If you like following the stock markets, the last
few weeks have provided quite the entertainment.
Between still another investment bank failure, lower
housing prices and rising commodity prices, its been
tough to make money in this market. While its easy
to say go long or go short, the violent price swings
in the markets made it downright frustrating trying
to make a few dollars. Shares would move up 1%, then
down 1.5% then rocket back up again - all in the
same day.
So what is an investor to do?
It doesn’t matter if you
trade penny stocks, look for a “safe” mutual
fund at the
mutual fund store, or are just looking to
protect your capital, you need a plan.
There are really 3 choices in front of you.
Depending on the depth of your pockets, how long
until you’ll need the money and the degree of risk,
one of these situations will fit you perfectly.
However, there is a cost.
First choice: Go long…
The markets have always gone up. Sometimes, it just
takes a little longer. And sometimes, it you will
hit major lows before making newer highs. It all
depends on perspective. If you bought shares in some
high flyers during the late 1990’s and held, you’re
probably still in a loss position. If you bought in
1995, you’re probably still sitting pretty, despite
the very high levels of 2000. Will this time be
different? Who knows. When the stock market crashed
in 1929, it took over 15 years to get back to that
level. If you have time on your side, going long
works.
Second choice: Go short…
We’re in a bear market. Don’t confuse a move up with
the end of a bear market. Most often, its just a
signal to go short again. I like ETF’s like DXD, QID
and SDS, since they allow me to go short, by going
long since they act inversely to the market they are
following. Keep in mind that they are designed to
provide twice the inverse return of the markets they
are following. If the Dow Jones moves lower by 1%,
DXD will move higher by about 2%. Conversely, if the
Dow moves up by 1%, this etf will move lower by 2%.
Its not out of the question to see these ETFs move
direction by 5-10% a week. Great if you’re in
position when the trend is moving higher,
catastrophic if the market is moving lower.
On other thing to keep in mind about ETFs: You can
lose money, even when you break even. For example,
lets say DXD moves down by 10% this week, and
recovers 10% the following week. You would think
you’d be even. You’d be wrong. If DXD is trading at
$100, and loses 10% of its value, its worth $90.
When it moves up by 10%, it moves to $99 - 1% short
of break even.
Your third choice: Keep your cash
Yeah, its not as sexy and thrilling as trading, but
right now, its the smartest thing you can do. The
stock market will be around for awhile. Its better
to keep the powder dry and when the market gains
some footing, you’ll be ready to make like a bandit.
Remember, we wont hit a bottom, until everyone gives
up on the stock market. Without capitulation, we’ll
see many more bear traps. Play it smart, and be
ready to pounce when the time is right. |
