Looking for a crackling area in which to invest for the short-term?
“Short-term” investments generally mean investors hold them for as few as several days to as many as three years before selling them off — hopefully at a significant profit. Here’s a look at how you can take advantage of short-term stock investing to boost returns and the best short-term investment options right now.
A Look at Short-Term Investing
Greg Schnell, a chartered market technician and board member of the Canadian Society of Technical Analysts, calls himself a “swing trader” — someone who favors holding securities for only weeks or months at a time — sometimes a bit longer if the shares are performing well enough.
Schnell explained that a swing trader like himself would get into the market as long as things are going in his direction and exit the trade when the security in question is no longer dong what he wants it to.
For example, he said a semiconductor manufacturer called Skyworks Solutions has been a top-performing stock for over a year. “A swing trader could still hold this stock since every month it’s making a higher high,” he said.
“Why would you want to own a stock losing money for more than a year?” he asked.
A Highly Controversial Practice
Actually, there is a very good answer to that question.
Short-term investing is a high-risk endeavor, most financial advisors warn.
“Based on the 15-year rolling average return on a small-cap stock, mutual fund or index fund, an investor’s chance of making a strong return over 10 years is close to 90 percent,” advised Scott Hanson, a certified financial planner with Educators Financial Services in Shoreview, Minn.
“On the other hand,” said Hanson, “If you’re going to invest short-term, you are gambling and really just taking tremendous risk.
That’s because short-term investors have to time the market very precisely — basically predicting what will happen within a very short space of time. They need to very quickly buy a stock at its lowest point and sell it at its highest, with no opportunity for highs and lows to balance out over time.
On the other hand, short-term investing has some advantages, assuming you are aware of the risks involved and have a very good strategy or a top financial consultant in place.
Keep Reading: How to Invest in the Share Market
Advantages of Short-Term Investing
“If you have a shorter time horizon, the investor can take advantage of intermediate market pricing trends — over three- to- nine months perhaps — and reduce portfolio volatility along the way by avoiding major market swings taking place over long periods of time when the market is trending down,” said Keith Newcomb, portfolio manager and founder of Full Life Financial in Nashville.
Assuming you have good insight into the industry or company in question and feel there is an upside to investing for the short-term, it will also prevent your having to tie up your money for long periods when you might need to invest or otherwise deploy it elsewhere.
“Risks can be managed, and substantial returns can show up very quickly,” Newcomb said.
Still, there is a good deal of disagreement with regard to short-term versus long-term investing.
“Many traditional money managers disagree with the approach that I take,” said Howard Bandy, who has designed trading systems and wrote about quantitative trading in five books for Blue Owl Press, his company in Eugene, Ore.
Bandy explained trading and investment in terms of mathematical and statistical modeling. His method is to first evaluate and manage risk, then maximize profit for a given level of risk tolerance.
The reason so many experts are able to point to the comparative success of long-term investing, he said, is based on “the uniquely favorable period following World War II.” Before 2000, the equities market had not had a negative 10-year period since the 1930s, for instance.
What to Look For in Short-Term Stock Investments
In Bandy’s opinion, the most profitable methods trade frequently (20 to 30 times per year), hold a short period of time (two to four days) and have a high ratio of winning to losing trades (at least 65 to 70 percent). Bandy generally recommends trading highly liquid stocks or exchange-traded funds.
Schnell said he focuses mostly on the price action of top-quartile stocks — those outperforming 75 percent of stocks within a peer group of similar-size companies. Looking at an industry approach, Schnell sees 5-10 cyber security stocks going up dramatically. “It’s powerful when an entire group moves up at once,” he said.
“I look for stocks that have been treading water for a long time but are climbing out of the pond and putting on their track shoes,” Newcomb said. “I buy on short-term weakness or pullbacks in the context of a longer-term uptrend.
Short-Term Investments Besides Stocks
Rustman is in no way a fan of short-term investing, particularly if you are keen on a single stock or “one-trick pony,” as he calls it. The risk of loss here will always be greater than when one is betting on a basket of stocks or bonds, which is why Rustman recommends ETFs for those interested in shorter-term investments.
ETFs are simply a basket of securities designed to closely replicate an index. They can be traded as easily as stocks and have lower transaction costs than traditional index funds.
For clients investing on a shorter-term basis than usual (calling for a minimum three-year holding time), Rustman favors what he calls “tactical investing.”
Tactical investing refers to a shorter-term strategy within an overall asset allocation, in this case favoring longer-term assets. One way to do that is to emphasize different market segments, for example, a portfolio with a 40 percent exposure to large-cap stocks might have 2 percent to 4 percent emphasizing financials or cybersecurity.
Rustman also likes the financial sector right now because interest rates are beginning to rise, and he has recommended that some clients consider appropriate ETFs as part of their equity allocations.
Depending on the choice, this can still be an aggressive move, as some ETFs in this space are leveraged, and leverage uses debt, which amplifies losses as well as gains. “If the financial sector goes down, there will be double losses,” he said.
Rustman’s method is part of a larger strategy: an investor might want to consider sticking with a leveraged financial industry ETF for three to six months based on its short-term performance and then re-evaluate that decision.
10 Best Short-Term Equity Investments
1. Purefunds ISE Cyber Security ETF (HACK)
“HACK is one of the top-performing ETFs in the market right now,” said Schnell. It was trading at $29 in early May and as of mid-June was at $33 — “up 10 percent in a month,” he observed.
2. AVG Technologies (AVG)
AVG, a global anti-virus and security software company, is another favorite of Schnell’s — up from $23 to $28 over the six-week period ending June 17. In a mid-June report, JMP Securities analyst Patrick Walravens raised the price target from $33 to $47.
3. SPDR S&P 500 ETF (SPY)
This ETF, which tracks the S&P 500 index, is recommended by quant specialist Hanson, who said his “sweet spot” for trades is within just two to four days. Hanson noted that it is the world’s largest and most liquid equity security, with daily dollar volume regularly exceeding $20 billion.
4. Financial Select Sector SPDR Fund (XLF)
This S&P 500-based ETF tracks the financial sector, is very easy to model and has good profit-to-risk characteristics, Hanson said.
Both the SPDR S&P 500 ETF and the Financial Select Sector SPDR Fund have good liquidity, excellent profit potential and controllable risk, he said.
5 and 6. Goldman Sachs (GS) and J.P. Morgan (JPM)
Goldman Sachs and J.P. Morgan are among the best short-term stock investments, said Schnell, as both have been climbing to new highs for months. Moreover at a time when interest rates are expected to rise — albeit more slowly than had been expected based on the Federal Reserve’s latest announcement — financial companies are expected to perform better.
7. MetLife (MET)
MetLife also broke out in mid-June to “fresh new seven-year highs,” said Schnell. MetLife topped $57 in June, and is 52-week low was $46.10.
8. IPC Healthcare (IPCM)
This firm has begun trending higher after a 12-month pause and appears in to be in a new uptrend, said Newcomb. “This hospitalist company benefits from the increasing demand on physicians to increase efficiency and improve patient outcomes,” he said.
9. FireEye (FEYE)
FireEye continues to outperform its technology sector peers and the broader market, Newcomb observed. “This network security and data protection company benefits from strong demand for its services across public and private sector entities,” he said.
10. Vulcan Materials (VMC)
Vulcan Materials is the nation’s largest producer of construction aggregates — primarily crushed stone, sand and gravel. “This industrial and building materials company benefits from the growing demand to build and maintain roadways and other construction materials,” Newcomb said.