How to Invest in a Down Market

Even when the stock market turns down, it is possible to make money. Bear markets are great times to buy stocks at bargain prices and bet against stocks indices using short selling and inverse stocks.

Steps

  1. Check a market graph for tops and bottoms in the market.
  2. Sell your mutual funds. Mutual funds drop like a rock during a bear market because everyone is selling the same stocks, and mutual fund managers have to sell to meet redemptions.
  3. Select a stock and back test it by checking its performance in a previous down market.
  4. Place buy orders for stocks now at limit prices well below the market. In a panic during a bear market, stocks can be driven to incredibly low prices temporarily, before bouncing right back up as bargain hunters come in. Your well below market limit prices have a good chance getting filled in a bear market.
  5. Sell covered calls to protect yourself from further downside exposure.
  6. Short widely held stocks, especially those nearly 100% owned by institutions. If you think a stock is going lower, sell it short. Alternative, buy inverse ETFs. Set a trailing stop to preserve your gains as the market can go up in a instant and inverse stocks will drop like a rock.
  7. Buy puts. Puts are options you can buy when you think a stock is going lower. When the stock goes lower, your 'put' option goes higher, making you money.
  8. Buy gold, especially near the beginning of a bear market, when stocks prices are high and the Dow/gold ratio is above its long term average of 20:1.
  9. Buy currencies of developed countries (such as the yen and the dollar). They will hold up in value as currencies of emerging countries crash.
  10. Buy investment grade bonds. They will hold up better than stocks in a bear market.
  11. Buy high quality dividend stocks. They decline much less in a down market, and pay you while you wait for stocks to turn around.
  12. Buy stocks that are down because the whole market is down. Don't buy stocks that are down because of bad earnings, bad outlook, bad news, etc. In a bear market, all stocks will go down. The good stocks will get dragged down with all the other stocks; they will bounce back when the market turns around.
  13. Buy small cap stocks, because they tend not to be owned by mutual funds, so they can hold up in value during a bear markets when mutual funds are forced to sell stocks.
  14. Buy initial public offerings (IPOs). Only the most financially sound companies can afford to go public in a bear market.


Tips

  • When things look their worst, and you really want to sell and get out, that is probably the time to buy!
  • Never panic. Buying high and selling low is the worst thing you can do. Be patient, the market will most likely come back over the long run.
  • Conduct more research than you typically would. Research the macro level economic view on Cnnmoney.com and Forbes.com. Scope out niche related sites as well that break down investment vehicles on a micro level. If you are a beginner, check out novice sites like The Motley Fool and find as many new investment information sources as possible by visiting review sites like Greedreviews.com.
  • Learn something about technical analysis. Go to http://stockcharts.com and click on "Chart School". It's free and an excellent introduction to technical analysis, including point and figure chart interpretation.

Warnings

  • Do not use margin. If you use margin and your stocks decline enough, you will be forced to sell at the bottom.
  • Do not enter an inverse fund too early. Make sure there is a 14 day down turn indicating the bears have taken over.
  • Do not buy emerging market stocks. They will crash as the global economy sours.

Related wikiHows

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