The Big Short - shorting vs CDS
"To be able to truly short something you technically need to be able to borrow the security so you can sell it.  There needs to be a system for borrowing in place to be able to do this which is very robust for large U.S. stocks but doesn't exist for CDOs mainly due to the complex legal structures around them.   However, the word ""short"" is commonly used in finance to mean profiting from a loss of value of something.  So the use in the movie title, though a bit confusing, was fine. Credit Default Swaps are not technically insurance as you don't need own the thing you are ""insuring"" (and for a few other reasons).  However, I agree with the movie that thinking of them as insurance is a pretty good way to understand them.  As you are playing a monthly premium to for a contract that pays out when something goes very wrong.   However, the movie was a little fast a loose as CDS of various types were regularly traded well before the bubble even started.  Though maybe not that particular type of CDS.  So while they may have been ""expensive"" it was the easiest route and reasonable idea."
"When trading Forex each currency is traded relative to another. So when shorting a currency you must go long another currency vs the currency you are shorting, it seems a little odd and can be a bit confusing, but here is the explanation that Wikipedia provides: An example of this is as follows: Let us say a trader wants to trade   with the US dollar and the Indian rupee currencies. Assume that the   current market rate is USD 1 to Rs.50 and the trader borrows Rs.100.   With this, he buys USD 2. If the next day, the conversion rate becomes   USD 1 to Rs.51, then the trader sells his USD 2 and gets Rs.102. He   returns Rs.100 and keeps the Rs.2 profit (minus fees). So in this example the trader is shorting the rupee vs the dollar. Does this article add up all other currency crosses to get the 'net' figure? So they don't care what it is depreciating against? This data is called the Commitment of Traders (COT) which is issued by the Commodity Futures Trading Commission (CFTC)  In the WSJ article it is actually referring to Forex Futures. In an another article from CountingPips it explains a bit clearer as to how a news organization comes up with these type of numbers. according to the CFTC COT data and calculations by Reuters which calculates the dollar positions against the euro, British pound, Japanese yen, Australian dollar, Canadian dollar and the Swiss franc. So this article is not talking about futures but it does tell us they got data from the COT and in addition Reuters added additional calculations from adding up ""X"" currency positions. No subscription needed: Speculators Pile Up Largest Net Dollar Long Position Since June 2010 - CFTC Here is some additional reading on the topic if you're interested: CFTC Commitment of the Traders Data – COT Report FOREX : What Is It And How Does It Work? Futures vs. Forex Options Forex - Wiki" The range is fine. It's ~ 1-2X your annual income.  First, and foremost - your comment on the 401(k), not knowing the fees, is a red flag to me. The difference between low cost options (say sub .25%) and the high fees (over .75%) has a huge impact to your long term savings, and on the advice I'd give regarding maximizing the deposits.  At 26, you and your wife have about 20% of your income as savings. This is on the low side, in my opinion, but others suggest a year's salary by age 35 which implies you're not too far behind.  Given your income, you are most likely in the 25% federal bracket. I'd like you to research your 401(k) expenses, and if they are reasonable, maximise the deposit. If your wife has no 401(k) at work, she can deposit to an IRA, pre-tax.  It's wise to keep 6 months of expenses as liquid cash (or short term CDs) as an emergency fund in case of such things as a job layoff. They say to expect a month of job hunting for each $10K you make, so having even a year to find a new job isn't unheard of.  One thing to consider is to simply kill the mortgage. Before suggesting this, I'd ask what your risk tolerance is? If you took $100K and put it right into the S&P, would you worry every time you heard the market was down today? Or would you happily leave it there for the next 40 years? If you prefer safety, or at least less risk, paying off the mortgage will free up the monthly payment, and let you dollar cost average into the new investments over time. You'll have the experience of seeing your money grow and learn to withstand the volatility.  The car loan is a low rate, if you prefer to keep the mortgage for now, paying the car loan is still a guaranteed 3%, vs the near 0% the bank will give you. I'd imagine that it's a small portion of the population that can have much of both. If one is saving a decent amount for retirement, say 10-15%, they aren't likely to have much else, aside from the house if included. For example, when I look at my 'pie chart' I get Retirement 72%, House 22%, everything else 6%.  Specific to your question, emergency funds should be just that, accessible for urgent matters, other short term needs, such as car fund, big TV fund, vacation, etc, also in non-risky cash (i.e. money funds CDs, etc) and the rest invested long term. The short need money isn't part of the long term asset allocation, to be specific. 5 years is very short term, and since you are sure you'll need the money, investing it into the markets should probably not be done. You can toss it in Ally bank for 1% or consider a 5 yr raise your rate CD A decent write-up on time horizons: http://www.investopedia.com/articles/investing/110813/using-time-horizons-investing.asp If you want to go the stock/bond route you can assess the benefits of using something like a vanguard target date fund, or a roboadvisor such as wealthfront or betterment. You need to assess whether you think you may move up your time horizon, say you want to buy a house in 4 years, or, if it is 5 years, are you ok with it being 6.5-7 if there is a market downturn. "A Credit Default Swap (CDS) is a contract between two parties. A useful analogy is insurance (but by no means exact).  I pay a quarterly premium in order to insure myself against another event.  In this case, it might be that I own some IBM Bonds.  I am happy to own those bonds, and like the ""coupon"" that they pay me.  But I am a little worried about IBM going bankrupt.  So I can find someone willing to sell me a CDS.  So long as I keep up my ""premium"" payments, if IBM goes into default on their bonds, I get a payout. This analogy does break down at a couple of levels.  Firstly there is no requirement that I have to own the IBM bond in the first place.  I can in effect then ""take a view"" on IBM going into default by purchasing a CDS without owning the underlying asset. Also in the real insurance world, there are various capital requirements that the companies have to adhere to, while CDS market, being essentially unregulated has none. So to summarize, and while The Pedia has a pretty good article, they are good both to hedge your bet (i.e. protect your actual owned asset) or as a speculative tool to take a ""view"" on the likelihood of a company to go bankrupt." "This doesn't make sense to me. Writing a covered call gives him a long delta position - the exact opposite of what he wants. And the tax losses won't turn a losing position into a winning one.  Is there something I'm missing?  Edit: Also, doesn't ""shorting against the box"" mean he has to have a long position, and short against that? That means you've got zero net delta, which isn't very useful at all..." "So...if the stock market tanks, the value of these portfolios tank...but faster.  The difference time around being that the customers will be holding all of the toxic assets?  I also gotta say that it feels like there's a lot of, ""hey let's sell insurance and hope that nothing bad ever happens but if it does we go bankrupt and the customer's fucked too!""" In addition to the higher risk as pointed out by @JamesRoth, you also need to consider that there are regulations against 'naked shorting' so you generally need to either own the security, or have someone that is willing to 'loan' the security to you in order to sell short.  If you own a stock you are shorting, the IRS could view the transaction as a Sell followed by a buy taking place in a less than 30 day period and you could be subject to wash-sale rules.  This added complexity (most often the finding of someone to loan you the security you are shorting) is another reason such trades are considered more advanced. You should also be aware that there are currently a number of proposals to re-instate the 'uptick rule' or some circuit-breaker variant. Designed to prevent short-sellers from driving down the price of a stock (and conducting 'bear raids etc) the first requires that a stock trade at the same or higher price as prior trades before you can submit a short.  In the latter shorting would be prohibited after a stock price had fallen a given percentage in a given amount of time.  In either case, should such a rule be (re)established then you could face limitations attempting to execute a short which you would not need to worry about doing simple buys or sells.   As to vehicles that would do this kind of thing (if you are convinced we are in a bear market and willing to take the risk) there are a number of ETF's classified as 'Inverse Exchange Traded Funds (ETF's) for a variety of markets that via various means seek to deliver a return similar to that of 'shorting the market' in question.  One such example for a common broad market is ticker SH the ProShares Short S&P500 ETF, which seeks to deliver a return that is the inverse of the S&P500 (and as would be predicted based on the roughly +15% performance of the S&P500 over the last 12 months, SH is down roughly -15% over the same period).  The Wikipedia article on inverse ETF's lists a number of other such funds covering various markets.   I think it should be noted that using such a vehicle is a pretty 'aggressive bet' to take in reaction to the belief that a bear market is imminent.  A more conservative approach would be to simply take money out of the market and place it in something like CD's or Treasury instruments.  In that case, you preserve your capital, regardless of what happens in the market. Using an inverse ETF OTOH means that if the market went bull instead of bear, you would lose money instead of merely holding your position.