On Friday of the fourth week from your starting date, simulate a $50,000 purchase of SPIDERS (Trading symbol SPY). SPIDERS stands for shares of an Exchange Traded Fund traded in the AMEX. SPIDERS mimics the Standard & Poor 500 Index, a broad market index. This strategy will work well during the "bull" market. When the stock market goes up, you gain the average of the market return. This strategy worked well during the long bull market from 1983 to around March 2000.

Selling short an Index Fund

Short-sellers are investors who borrow stock from a broker and sell it in the market, betting that the stock price will fall so they can buy it back at a lower price. This strategy works well during the bear market. The bear market started in March 2000. For a period of slightly more than 2= years, all major market indexes lost considerable ground. The Dow Jones Industrial Average dropped from 11,500 to around 7,800, the S&P 500 dropped from more than 1,500 to around 800, and the NASDAQ Composite Index dropped from more than 5,000 to around 1,200.

On Friday of the fourth week from your starting date, deposit a simulated $50,000 in a broker's account. Borrow stock from the broker and short-sell "QQQ", the trading symbol of shares of an Exchange Traded Fund traded in the AMEX. QQQ mimics shares in the NASDAQ 100 Index. On the 9th week from your starting date, buy back all shares of QQQ. If the price of QQQ goes down, you make a profit by selling high and buying low. During less than 10 months in the year 2002, some ultra short mutual funds employed this strategy successfully. For example, ProFunds: Ultra Short OTC investment fund gained 136%. However, shorting can be a risky investing strategy because unlike buying stock, where you cannot lose more money than you put in, short-selling losses can be unlimited if the borrowed stock keeps rising. Leo Guzman, president of Guzman & Company, a brokerage firm, warns shorting should be left for the professional investors.

Record the dates of buying and selling, number of shares, price per share, total purchases and sales. For the purpose of computing gain or loss, use $100 total for the broker's commissions and the fund's management fee.

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Note The simulation dates and prices used in this example are fictional and for illustrative purpose... View the full answer