Time to Get Serious About Utilizing Short ETFs

by: Richard Shinnick

Right now and right here, I am changing the game! Pay attention so you don't miss anything! It is time to invest short for the long run! What we need here is some commitment, some discipline and most importantly a plan! It is time to give up hope, shoot Goldilocks, and just accept the fact that the long-term trend is down. Knowing that and accepting that is the key to your future success!

So, here are the new rules which are really the old rules modified for the new world:

Rule #1: Keep Things Simple but Diversified: With today's new range of ETFs there is no reason to try and pick individual equities to short. Remember, the downside on a short position is unlimited. So, I recommend a basket of ETFs heavy on the ultra short variety along with a strong weighting in precious metals and international bonds to serve as a hedge against the falling dollar.

The Portfolio

  1. ProShares UltraShort S&P 500 (NYSEARCA:SDS)
  2. ProShares UltraShort Financials (NYSEARCA:SKF)
  3. SRS ProShares UltraShort Real Estate
  4. ProShares UltraShort QQQ (NYSEARCA:QID-OLD)
  5. ProShares UltraShort Consumer Services (NYSEARCA:SCC)
  6. ProShares UltraShort FTSE/Xinhua China 25 (NYSEARCA:FXP)
  7. StreetTracks Goldshares ETF (NYSEARCA:GLD)
  8. ishares Silver Trust ETF (NYSEARCA:SLV)
  9. Cash in foreign bonds

Rule #2: Allocate Appropriately: Standard allocation strategies still apply but be mindful of taking advantage of the leverage used in the double short ETFs. For example, a conservative investor may choose to go 65% cash, 10% metals, and 25% allocated amongst each of the short and ultra short securities mentioned. The ultra shorts count $2 for $1 so what would have been 50% of a portfolio can now be 25% with the same net effect. This leverage can free up cash for conservative investment in foreign bonds.

Rule #3: Don't Try to Time the Markets: It is a historical fact proven out over four months that the markets go down over time. Using this diversified basket of securities and cash allocations will allow you to sleep at night without the constant monitoring that long positions have entailed lately. In this new world, I recommend simply rebalancing your portfolio once every month rather than daily as many investors seem to be doing lately.

Rule #4: Stay Focused on the Negative: The markets will have rallies, but focused short investors need to simply accept that and keep their time horizon in mind. Over the next 30 or so years the governments own accounting office estimates we have a $50 trillion shortfall on entitlement obligations (or is it $30 trillion? I forget but it is really bad.). Consumers don't have two nickels to rub together and will have to stop consuming. The real estate\credit implosion gets worse every day and defaults on loans of every kind are only just getting started. Oil is at $102 and inflation is on its way to 15%. There is a war going on, which you can read about on the 27th page of the paper sometimes. Finally, Roger Clemens will likely be investigated, indicted, and jailed for perjury. There is no lack of bad news, just focus! Well, maybe Clemens will get a pardon.

Rule #5: Ignore the Media Pundits: Cramer is great at being Cramer, but he is wrong a lot! So is Kudlow. And good God, whatever you do, DON'T LISTEN TO DENNIS KNEALE! Pay more attention to what IS happening that what people say is going to happen. For example, did anyone like that 200 point Gasparino rally last week? Sure the monolines\duolines are getting bailed out on Monday Charlie, sure they are! Maybe this Monday Charlie?

Rule #6: Never go Long Stocks: Have you noticed that on 300 point down days even "winners" go down with the market? This includes miners, oil service companies, energy producers, and even commodity plays. On big down days, stocks are stocks and being short the market is the only way to win. You hear it all the time, "hedge funds are getting margin calls and selling their winners to pay for their losers." Why was gold up while gold miners were down? The answer is, because stocks are stocks! On the 1,000 point down days that are coming, I don't care what stock you own, you are going to suffer! Being short the market will be a beautiful thing on that day! Keep disciplined and never go long a stock!

Rule #7: Think for Yourself: Whatever you do, don't pay attention to rules 1-6! Well, except the part about ignoring Dennis Kneale. So, here is the deal, I am obviously not very serious about this as a complete strategy and I believe that shorting stocks is silly for the long run. I have plenty of long investments in retirement accounts, college funds, etc. I trade a lot but I am not currently long or short any of the securities mentioned above, although I might be tomorrow. What I have presented here, however, is actually a viable short run strategy, but I do NOT "advocate" it. It is just an idea for discussion and it is really a compilation of ideas that I have been reading about. I have not seen anyone create a "complete" do it yourself bear portfolio though. There are "bear funds" and I assume this is what they do though.

In any case, it certainly is what is "working" these days. Maybe I can call it "The Do It Yourself Diversified Pessimists Dream Portfolio?" Ok, that is stupid. Anyone have a better name? More importantly, how much longer can this portfolio work? Can anyone imagine what would really happen if financial planners did begin laying out short positions as part of a "diversified" portfolio? Should they? Comments appreciated.

Disclosure: None