What are the short-term investment options? “To everything there is a season. A time to be born and a time to die. A time to plant and a time to sow.” I would add there is a time to buy and a time to sell stocks.
The goal of short-term strategies is to synchronize your investments with market direction. These strategies demand constant assessment of the economy, political climate, the direction of interest rates, the dollar, etc. For this investor, the most important decision is market timing, and less important is the selection of the company in which to invest. The strategy suggests buying in the bull market and selling in the bear market.
In a bull market investors get 100% invested in stock and in a bear market the investor buys money market funds. The most aggressive investors use margin in bull markets (borrow money from investment firms), and sell short in bear markets. Two short-term strategies which produced over 15% annually follow.
Don’t Fight The Fed – best short term investment strategy
This strategy was created by Martin Zweig. Zweig follows the prime rate as an indicator of buy and sell signals. The prime rate is the rate which commercial banks charge their best customers. It’s easy to follow on the internet, radio, newspapers or television and it changes once a month on the average. Most of the time the prime changes, by 1/4% or 1/2%.
The prime rate indicator allows the investor to follow the direction of interest rates which is controlled by the Federal Reserve Bank. At any given time investors seek the most competitive yields to invest their money in. Stocks compete with bonds, etc. When the interest rates are falling the investments in stocks are more attractive and vice versa. For example, investors who bought 2 year CDs yielding 9% are more likely to seek another haven for their money if the bank offers to roll them over for another 2 years at 4%.
Zweig considers prime rate at 8% and over, to be high and below 8% low. In the 33 year period of his analysis (1954-1986), Zweig observed 19 buy points and 18 sell points. 16 buy points or 89% brought profit and 3 buy points ended up with a moderate loss. 12 sell points or (67%) brought profit and 6 sell points (33%) brought losses. The total annual gain was 17.9% in comparison to a 9.10% gain for buy and hold investors.
The following are the rules for buying and selling securities.
Rules for Buy points – short term investment tips
• If the prime rate is below 8%, the buy point is triggered after its first decline. For example, if the prime rate increased from 6% to 6.5% and then to 7.5%, its decline to 7% triggers a buy.
If the prime rate is above 8%, a buy point is given either after a one time full point decline or two subsequent declines. For example, if the prime rises from 8.5% to 9% and subsequently declines to 8.5% this is not sufficient to trigger a buy point. The subsequent decline to 8% would trigger a buy point.
Rules for Sell Points – short term investment strategies
• If the prime rate is 8% or higher, a sell point is triggered after its first increase. For example, if the prime dropped from 11 % to 10.5% and subsequently to 10%, its first increase to 10.25% signals a sell.
If the prime rate is below 8%, a sell point is given either after a one point increase or two subsequent rises. For example, if the prime dropped from 7.5% to 7% and subsequently increased to 7.5%, it is not sufficient to trigger a sell point. The next increase to 7.75% would signal a sell point.
You can also read about don’t fight the tape method. It’s another important short-term investment strategy in share market.