Sound Investing in the Coming Bear Market

[cramerjohn004]

In the current troubled financial outlook, gold, in my view, is a solid investment. During a crisis or a highly uncertain economic period, gold represents a safe-haven. The weakening dollar, financial institution plight, and inflation all point to gold as a means to protect the value of your capital. Exchange traded funds (ETFs) are a particularly easy method by which to own gold as a commodity. They are a pure play, rigorously track the price of gold, are actively traded, and listed on major exchanges. A drawback to gold-related ETFs is that gains are taxed as collectibles, at a maximum of 28% rather that the 15% long-term capital gains tax on stock appreciation.

Shorting stocks is another defensive measure Regular Saving Plan during a major stock market fall-off. But this is more speculative, so it should only represent a tiny portion of your investment portfolio. Betting that a stock will decline carries with it the possibility of infinite losses since stocks can rise forever but only decline to zero. Timing, volatility, even brokerage availability of shares to lend out are issues. Identify industry sectors that will be heavily impacted by the recession or other crosscurrents in the economy. Seek companies that are the most vulnerable. And select stocks with valuations that still have ample room to contract. The process is challenging since the stocks most susceptible to the dangers ahead are obvious and have already collapsed, such as in the home construction, banking and brokerage, and consumer retail sectors. You need to be on the early side and have reasonable insight. In the case of shorting, I would fervently advise cutting your losses if the shares move in the wrong direction and rise by 10%. It's a tight leash because the risk is so pronounced. Still, shorting is a means to offset declines in your long-term, high quality, value-oriented, dividend-paying stock investments.