In Ben Stiller’s parody of the fashion industry, Zoolander, the protagonist possesses a critical flaw preventing him from regaining kingship of the runway world: Zoolander does not turn left. As an avid reader of the mainstream financial media, I have noticed a similar critical flaw: many of my peers do not sell short or buy puts. If the market can go up and down, we need to learn how to invest for up and down. Otherwise, we are like Zoolander or a car driver who turns only right: we lose ground when we need to go left. Thus, investors are not whole without shorts and puts.

I agree that shorting and buying puts has risks. However, I have read numerous recommendations in the financial media to buy homebuilders and banks while these industries are experiencing a crisis, and such buying has proven extremely risky (if not detrimental). On the other hand, short sellers and those buying puts of homebuilders and banks have crushed the markets with superior gains. SGS has achieved gains of 21.6%, 36%, and 65% selling short Build-A-Bear Workshop (BBW) and buying puts of Blockbuster Inc. (BBI) and Martha Stewart Living Omnimedia (MSO), respectively. Consequently, investors who only buy are stubbornly losing hard earned capital and opportunities to profit in down markets.

If you are not interested in selling short or buying puts, sit tight and relax in cash while waiting for the next bull run. You can do a lot of research on potential buys while the markets are down-trending - but you must also resist the temptation to go bottom-fishing. Bottom-fishing in a down-trending market is like shorting stocks in a high flying market: you can never predict how long the irrational trend will sustain from inertia (and it’s usually much longer than your stomach or investment account can handle).

I agree that cash is a poor investment for the long run. Money market returns are not strong in the face of core inflation at 3% and healthcare-energy-food-education inflation much higher. However, a 4% money market return may be stellar if the markets go negative. Many people forgot this golden rule of capital preservation when the dotcom bubble burst. I, for one, wish I had held more cash at the time.

In addition, if you are sitting in cash watching the market whip-saw, keep in mind you need only a handful of strategic investments to score superior returns. You do not need to continue investing every time you have spare cash. If you trade too often (from impatience or a tendency to enjoy the rush), you risk making many mistakes. If you trade too rarely (from paralysis by over-analysis or fear), you risk missing opportunities. The key is to be savvy and strategic rather than fall victim to these extremes.

For example, even if you sit out of the market for the next six months, if you grab shares of KBW Bank ETF (KBE) and end up doubling your money in 3-5 years, it will have been worth the wait. A wise ancestor of ours once noted that patience is a virtue.