While selling stock short can look like a surefire way to make money, it can also cause you to lose more than you may be willing to. Whether you engage in short selling or not really depends upon what kind of risk you are comfortable with. If you think you can handle the possibility of losing money because a stock goes up in value, then the prospective advantages of this strategy may outweigh the potential costs. However, if the idea of losing money because a stock goes up in value makes you squeamish, then perhaps it would be best if you stayed away from this idea.
PUTTING THEORIES INTO ACTION
Now that we’ve discussed portfolio killers and some strategies for wise investing, take a look at your accounts. Do you find that you seem to be dumping lump sums into the market only to see the mar- ket go down? Are you investing little by little? Or are you trying to time the market?
I have a client who came to see me for the first time during the summer of 2000. He joked that he was bad luck because, he said, every time he and his wife invested more money in the market, immediately it would go down. He even said that maybe we should call our other clients and warn them! Even though his outlook was that the market would go down after his money was invested (and, for the record, the market did go down), he continued to invest his money. He knew, as all wise investors do, that to not be invested is a far greater mistake than to invest at the “wrong” time. I’ve said it before, but it’s worth repeating. No one knows what the market will do for sure. The experts can speculate all they want based on prior performance, but that doesn’t mean that the market is going to follow its past trends. If you are afraid that once you invest your money the market will go down, try using the DCA method. And if the market does go down, hold your position.
PAPER LOSS VERSUS ACTUAL LOSS
There is a difference between your account value going down and losing money. Many people don’t understand this concept. Basically,