What Goes Up Must Come Down... And Sometimes Both

If anyone were to make commemorative coins of the 2008 Wall Street experience, I think it would be appropriate to put an image of a roller coaster on one side of them (and maybe a concrete parachute on the other). It was, and continues to be, a wild ride. As things stand right now, a lot of people are down quite a bit on their positions. (I hate saying "lost a lot of money" because you don't really lose in stocks and whatnot until you sell. People saying that all the time when prices decline perpetuate a lot of wrong thinking about investing, I think.)

As this has all played out, I'm surprised that there hasn't been more discussion of what is known as "market neutral investing." Put simply, a market neutral portfolio is one that contains both long and short positions (being "long" a stock means owning it; being short means one has borrowed some shares and sold them with the obligation of replacing them later, hopefully after their value has declined and they are cheaper to repurchase). Sometimes this is referred to as "hedging," but usually I see that mentioned as a side note and not a main strategy. In a market neutral portfolio, hedging is the strategy - of the stocks that are held long and those held short, you would weight the portfolio more to the side that you think is more likely to prevail. Thus, if you think the markets will rise, you might put 60% into your long positions and 40% into your short positions. That way, if you are correct, your winners gain more than your losers, but if you are wrong, you don't lose as much as you would have if you went 100% long.

It's something to think about as we slog our way through the current state of affairs. It's now not even necessary to have a brokerage account set up for shorting stocks as there are exchange traded funds you can buy long that are composed of equities and other things held short (for example, if you want to short the Dow 30, you could go long shares of DOG, an exchange traded fund that is short the companies that make up the Dow 30). As the markets change, so must our strategies, and this one may be a good way to handle investing for the time being.