Good Investments in a Down-Turning Stock Market
When the market is turning south, investors have three basic options. You can take a flight to safety, protecting your investments from loss, you can try to profit from falling prices, or you can do a combination of both. Buying bonds and putting your money in a money market account are two traditional ways of protecting your money during market downturns. Selling short, or investing in short-sale products offers a way to actually profit during bear market conditions.
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Bonds
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Bonds are traditionally considered a safe haven during bear market conditions. Keep in mind, however, that bond prices can fall, and lower-rated junk bonds have lost value during bearish stock conditions in the past as investors flee from risk. Higher-rated government bonds, however, have held their value during bear market conditions and have produced historic returns above 5 percent annually.
Money Markets
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Money market accounts are not guaranteed, but they invest your money in short-term, guaranteed bonds and certificates of deposit, making them very safe places to keep your money during all market conditions. They generally pay interest of less than 1 percent per year, but this is better than losing money in the markets when the markets are declining.
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Short Selling
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It is actually possible to make money during falling markets by selling stocks short. Short selling involves borrowing stock shares from your broker and selling them on the open market. Because you borrow the shares, you are obligated to return them at some point in the future. If you can buy the same number of shares back at lower prices, you get to keep the difference between the price you received and the price you paid as your profit.
Inverse ETFs
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Selling stocks short can be a bit complicated. A simpler alternative is to buy an inverse exchange-traded fund, or ETF. You can buy and sell an ETF just like a stock. Inverse ETFs are designed to rise when the stock market is falling. For example, QID is an inverse ETF that rises when the Nasdaq 100 index falls. Thus, if you own QID during a falling market, you can profit from the market's price decline.
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References
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