One of the reasons I chose to invest in the Direxion Small Cap Bear 3X Shares (TZA) is that it primarily contains small cap stocks and small cap stocks traditionally have a high BETA. What this means is that if the market starts to tank, you will get more of a gain if you are on the short side. So if the market does go down, not only will I be leveraged 300%, but I will also make much more than if I would have shorted the S&P 500. However, it also means you will lose more if you are short and the market begins to rally. For those of you unfamiliar with the BETA or BETA Coefficient I'll give you the definition supplied by my trusty Barron's Dictionary of Business Terms. "BETA Coefficient: Measure of a stock's relative volatility. The beta is a covariance of a stock in relation to the rest of the market. The Standard and Poor's 500 Stock Index has a beta coefficient of 1. Any stock with a higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market". I couldn't have said it any better myself.
At the present, I am up 24% for the month that I have owned the Direxion Small Cap Bear 3X Shares (TZA). Up 24%. Maybe it's time to take some profits? I don't think so. I tend to let my holdings run for more than 12 months to take advantage of the tax laws. If you sell before the 365 day holding period, you are subject to capital gains at ordinary income rates which run around 35%. If you hold your positions for over a year, you can take advantage of the long term capital gains rate which varies on your income level from anywhere from 5% to 15%. There are circumstances when you have to sell before 12 months, like when you are in a big mover that triples or quadruples in just a short period of time and you think it's going to come back to earth, but for the most part, it's better to hang onto your shares for 365 days.
The portfolio I'm working with here is in a taxable account and I have to make investing decisions that take the IRS into consideration. I feel strongly enough about the economy taking a double dip in 2010 that I am willing to let my leveraged holdings run until after the 365 day holding period. However, you know what they say about best laid plans. I'll just let the shares follow the economic cycle until I feel it's time to get out and go long or go into cash for awhile. Most of the information I've come across about leveraged ETFs states you should hold the shares for short periods of time, even just days on the 300% leveraged products. I disagree in this circumstance because I believe the market will be considerably lower a year from now. I may get my head handed to me, but I'm willing to take that chance.
When putting my remaining cash to work last month, I considered buying 2,000 shares of the Direxion Small Cap Bear 3X Shares (TZA) ETF, but decided to go with 1,000 shares instead for the simple reason that I chickened out. Half of the portfolio leveraged 300% was too much risk for my blood. I really don't know where this market is going. Nobody does. Not George Soros, not Warren Buffet, not Carl Icahn and certainly not me. I can only make an educated guess and I've been wrong so far, but I'll stick to my guns. I had a good week, up $5,400. It's a step in the right direction, but I've got a long way to go before I'm back to even.