Buying small caps? Take cover
As Wall Street's big guns come back from summer holidays, risk rises for the little guys.
Investors are anxiously watching what the European Central Bank will do to address the region's debt crisis. Last week they were on the edge of their seats when Federal Reserve Chairman Ben Bernanke spoke at Jackson Hole, Wyo.
The uncertainty hasn't deterred small buyers who have been in the market recently. Unfortunately, I think they are setting themselves up for a major fall. During the last few days of summer, usually extending through the Labor Day week, smaller investors run the show. They are almost always net buyers, and they love small-cap stocks. Take a look at the iShares Russell 2000 Index (IWM) to see just how pronounced this is.
But with the market leaders returning from vacation, things will soon look completely different. Small investors pinning their hopes on Bernanke will likely be very disappointed.
What we do when the market declines defines us as investors, and the market is poised to decline. Regardless of whether Apple (AAPL) launches a new iPhone or President Barack Obama gets elected to a second term or QE3 turns out to be a pipe dream, our responsibilities do not change. We need to protect ourselves, but we should not miss opportunities either.
There are investment strategies that offer protection on the downside and an opportunity to profit even if the market does rise. There is no better time to adopt them than right now, when we are in a clear transition period. The baton will soon be handed to the market leaders, and they have a very different perspective than the little guy.
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