Why the long-term investment vehicles like mutual funds, exchange traded funds (ETF), and stock indices are worst kind of investments now?
Ron Gibson
Jul. 16, 2007

Successful investors understand the nature of the market place. We are at the end of a massive bull cycle. The real nasty deflationary bear market happened 75 years ago. Since then, we have experienced a bull market that is kind of unprecedented.

Even if we assume that this bull market will continue for some more time, it is essential to understand what is different today than it was in the nineties or eighties. If you understand that you will automatically be ahead of the crowd and generate some decent profit.

The investments especially the stocks, bonds, ETFs, and mutual funds are primarily in the hands of money managers that handle billions of dollars. The hedge funds, the private equity funds, the Asian central banks, large financial institutions, investment banks, huge employee pension funds, and the massive stock buy back initiatives are the primary participant in the market place.

What you can expect is unidirectional moves that defy any common wisdom. All on a sudden the direction will change and your portfolio can be trouble. Macroscopic volatility with a lot of big money trading will be the name of the game. You will soon see 1000 point Dow moves in one direction on one day and then the other on the other. If you are on the wrong side of the wave, you will get wiped out.

Simply put, today you cannot invest or trade without appropriate hedging instruments like options and options spread. Do not trade or invest in anything that does not have a liquid option trades. For example before trading Nasdaq QQQQ, first find out if you can write option such as covered calls. Call writing in stock market, like mutual funds, exchange traded funds (ETF) and stock indices is very limited, sometimes impossible and sometimes reserved for wealthy individuals.

The risk in this market is enormous because of macroscopic volatility. Make sure you understand that those who buy options without mathematical sophistications normally lose. Be wise, invest and trade with covered call writing and buying protective puts. Use the volatility on your side.

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