Reader Question: Should I Try Long/Short Stock Investing?
Occasionally I get reader questions about different stock investing strategies. I am, always, happy to answer questions. This is the latest I have received:
I had a buddy tell me something about a practically risk-free investment strategy called long/short. Should I try long/short stock investing?
The first thing I want to do is drive home the fact that now stock investing is “practically risk-free.” The only type of investing that is “practically risk-free” is cash investing in things like savings accounts and certificates of deposit. And even then, technically, there is a degree of risk (albeit a very small one). In any type of investment, there is a risk of loss. Always.
What is long/short stock investing?
I liked this explanation of what long/short stock investing is from Money Talks:
Long-short or long/short is a stock investing strategy followed by many hedge funds, portfolio managers and individual investors. The strategy was introduced in late 1980s. Long-short stock investing includes buying (taking long position) stocks which are assumed to perform high and selling (taking short position) stocks which are assumed to perform low, than early ones.
The idea is that you should buy stocks that do better than the stocks you sell. In this way, in theory, you always make a profit. One of the common ways of doing this is through paired trades in order to reduce risk.
However, it should be noted that you have to realize that in practice things don’t always work out this way. Fund managers and others have complex rules and algorithms that help them assess buying and selling choices. And even then, as we’ve witnessed in the last few months, they can still be wrong.
Bottom line: The casual investor should not try the long/short stock investing strategy. It carries a great deal of risk, and is not for someone who does not actively manage his or her investment portfolio. Indeed, long/short stock investing requires regular adjustment and the assumption of risk that may exceed most “regular folks” tolerance.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.
Tags: stock market, stock investing, investing blog, investing strategy,
long short investing, investment portfolio, risk free investing
