Selling Stocks Short is Akin To Gambling


Question:  The bull market is now in its seventh year. Some pundits are saying “Well, the stock market won’t go up this year the way it has been.  The best we can hope for is a normal, single-digit return.”  I own growth stocks but have recently invested in a mutual fund that shorts stocks.  Have I done a wise thing?  I’m starting to worry.

Answer:  Selling stocks short is more akin to gambling than to investing.  You are basically betting that the price of the stocks in the fund you bought are going to go down.  If you are right, you win.  If you are wrong, you lose.  It’s like tossing a coin, or playing roulette and betting on red or black.  As much as we human beings sometimes think we can predict what’s in store for stocks in the coming months, we really can’t.  

Market forecasters have to make a living, so they make guesses.  When they are right they look like geniuses.  When they are wrong they just keep trying until they are right. In most cases, prudent investment policy has no room for short selling.  Successful investors match their tolerance for risk with a well-diversified portfolio of investments in different asset classes.  They hold for the long term while monitoring and occasionally rebalancing their portfolios. 

On the other hand, successful gamblers are just plain lucky.  If you feel that your portfolio is over-weighted in high-priced growth stocks, then a better solution than short-selling might be to balance your portfolio with some value stocks or short-term bonds.  Value stocks are stocks of companies that could be considered underpriced. They have relatively low price-to-earnings ratios and relatively high book-to-market ratios.

Question:  I participate in my employer’s 401(k) plan and contributed the maximum allowable amount of $17,500 last year.  I also operate a small business as a self-employed individual.  My tax return is on extension. Can I still contribute to a SEP IRA and if so, what are my limits.

Answer:   Yes you can.  A SEP IRA is a self-employed pension plan.  You can contribute to a SEP IRA account any time before you file your 2014 income tax return, even if you are on extension, and deduct the amount you contribute from your adjusted gross income.  You can contribute up to 20% of your net self-employment income after your self-employment tax deduction.   Your maximum combined contributions to your SEP and your 401(k) cannot exceed $52,000.00 for 2014 and $53,000 for 2015.

Question:  What is the deadline for making contributions to my traditional IRA account?  How much can I contribute?  I participate in a 401(k) plan at work and contribute the maximum each year.

Answer:  The deadline for making contributions to your traditional IRA account is April 15th, the deadline for filing your tax return. The maximum 2015 contribution is $5,500 ($6,500 if you’re age 50 or older), regardless of how much income you have.  Since you are a participant in an employer-sponsored retirement plan, you will only be able to deduct your contribution if your income is below a certain level.  If your filing status is “married filing jointly,” you can fully deduct your IRA contribution if your income is below $98,000.  If you are single, that limit is $61,000.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to