I've come to the conclusion that the I need to start shorting stocks to protect our retirement and savings accounts. In the past, I shorted some stocks while keeping my long positions. So our portfolio was still net long. This time, I plan to short stocks with 95% of our portfolio in cash. So our portfolio may be net short this time.
I plan to short stocks with the following characteristics:
- Already in a downward trend. Some stocks have been declining since the beginning of 2011. Unfortunately, I know they exist since I previously owned two stocks that have declined since January : Ford and Citibank. I know there are others that have been declining for six months. Other stocks have been declining since April. Both types are worth considering for shorting.
I have learned not to short a stock that is still rise or near its peak, even if I believe it's overpriced. Such a stock can keep rising for a while before it declines, resulting in significant losses for someone shorting the stock.
- High short interest. Generally, people who short stocks do extensive research. High short interest means a large number of knowledgeable people believe the stock is going down and have invested as such. The threshold level I use for high short interest is 5%.
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This is not financial or investing advice. Please consult a professional advisor.
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