Stock Investment Considerations for Bulls and Bears - dummies

Stock Investment Considerations for Bulls and Bears

By Paul Mladjenovic

Due diligence is necessary for your success as a stock investor. Make sure that you’re investing appropriately for your situation. If you’re 35, heading into your peak earnings years, want to ride a home-run stock, and you understand the risks, then go ahead and speculate with that small cap gold mining stock or the solar power technology junior stock.

But if you’re more risk averse or your situation is screaming out loud for you to be conservative, then don’t speculate. Go instead with a more diversified portfolio of large cap stocks or get the ETF for that particular sector.

For those people who want to make money by going short in those sectors that look bearish, again take a deep breath and remember what’s appropriate. Conservative investors simply avoid the risky areas. Aggressive investors or speculators may want to deploy profitable bearish strategies (with a portion of their investable funds). Here are some highlights for all of you.

Conservative and bullish

Being conservative and bullish is proper when you’re in (or near) retirement or have a family to support. After you choose a promising sector, just select large cap companies that are financially strong, are earning a profit, have low debt, and are market leaders.

If you do not like the idea of buying stocks directly, consider either sector mutual funds or ETFs. That way, you can choose the industry and effectively buy a basket of the top stocks in that area.

ETFs have been a hot item lately, and they’re a great choice for most investors because they offer some advantages over mutual funds. You can put stop-loss orders on them or borrow against them in your stock portfolio.

Aggressive and bullish

If you’re aggressive and bullish, you want to buy stocks directly. For real growth potential, look at mid caps or small caps. Keep in mind that you’re speculating, so you understand the downside risk but are willing to tolerate it because the upside potential can reward you so handsomely. Few things in the investment world give you a better gain than a supercharged stock in a hot sector.

Conservative and bearish

For many investors, making money on a falling market isn’t generally a good idea. Doing so takes a lot of expertise and risk tolerance. Analyze your portfolio with an advisor you trust and sell the potentially troubled stocks. If you’re not sure what to do on a particular stock, then (at the very least) put in stop-loss orders and make them GTC (good-til-canceled).

For example, look at the bear market that hit the U.S. in the mid-1970s. In 1974–1975, the stock market fell 45 percent. Stocks didn’t recover until 1982. If you had a stock that was at $100, it would have fallen to $55 and not returned to $100 until seven or eight years later.

What if you had a stop loss at $90? You would have gotten out with a minimal loss and could have reinvested the money elsewhere (such as in bonds or CDs) and looked much brighter than your neighbor.

Aggressive and bearish

Being aggressive in a bearish market isn’t for the faint of heart. However, this is where the quickest fortunes have been made by some of history’s greatest investors. Going short can make you great money when the market is bearish, but it can sink you if you’re wrong. Shorting a stock can backfire, so you should also consider buying put options.

Put options are a way to make money with limited risk when you essentially make a bet that an investment (such as stocks) will go down. There is an appropriate options strategy for most stock portfolios. You can find great (free) tutorials on using options at websites such as the Chicago Board Options Exchange and the Options Industry Council.