Shorting the Market

[csizemore@hsdent.com]

Q: Give the HS Dent view that we are in a long-term, secular bear market, do you recommend short selling?

A: As a general rule, we do NOT recommend short selling. We have found that most retail investors underestimate the risks inherent in taking a short position, as there is unlimited downside. Furthermore, short selling requires your timing to be exact. If you are correct about the general direction of the market but slightly off on the timing, you can still lose considerable amounts of money. Bear market rallies tend to be very fast and very powerful, and they can leave short sellers with large, sudden losses. As a result, we recommend that shorting is left to professional traders.

New products take some of the risk out of shorting, such as the inverse ETFs for various indices and commodities. These are less risky than traditional short selling, though we still recommend extreme caution when using these securities, as many are highly leveraged.

As a general rule, we believe the best way to profit from a bear market is simply to be out of the market in question and into safer alternatives such as bonds or cash. And as always, we recommend investors consult a financial advisor before making any investment decisions.