Simple Bear Market Strategy for Small Investors

by wadenelsonredditor

Most small investors don’t know how to make money in a bear market. Their stock strategy is “buy and hold.” They ONLY buy stocks (and funds) they believe will INCREASE in value. price.

Right now they’re madly buying Clorox, Netflix, Zoom, Invio, stocks they expect to buck the market. and go UP.

What are some investments you could make that will earn you money when stock prices and the overall market goes DOWN?

Investments that go UP when the Dow or S&P goes DOWN include A) Selling individual stocks short, B) buying PUT options C) Bonds, D) Certain “Negative” index funds, E) Precious metals, or precious metal funds, mining companies, etc. In this article I’m going to try to convince you to go with “D,” Negative Index Funds.

A) What is “Selling short?” You sell a stock at today’s higher price — agreeing to deliver it in 90 days or whatever — expecting it to decline in price between now and then. You pocket the difference.

For example Apple. With Chinese supply chain problems, Apple is LIKELY to decline in value in coming days. It would be a good stock to consider shorting. Along with WYNN – the casinos.

If you sell short, however, and the stock goes up, you can end up in real trouble.

OK TO SKIP THIS NEXT PARAGRAPH!

What are put options? A put option is a contract giving the owner the right, but not the obligation, to sell, or sell short, a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre-determined price the put option buyer can sell at is called the strike price

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Shorts are primarily for professional investors. You can lose more money than you started with, face margin calls (Send us more cash or lose your initial investment too!) Buying puts isn’t too risky, but writing or selling them — Danger Will Robinson!

Leave short-selling Apple and Amazon, and writing puts to big investors with deep pockets. Always remember, the market can remain irrational longer than your wallet is deep!

D) Negative index funds are a way for SMALL investors to take a position “betting” that the overall market will go down. You can POTENTIALLY only lose your initial investment, and not a penny more.

Let me tell you about a couple of index funds that GO UP when the S&P goes down. Like SDS

www.investopedia.com/articles/etfs-mutual-funds/042716/3-best-etfs-short-sp-500-sh-sds.asp

Full disclosure: I own shares in Proshares.com “SDS” fund.

SDS portfolio consists of short positions on stocks, and put options on stocks and other derivatives. (I don’t know it’s exact content, you can download a prospectus)

An index fund trades like a stock. You can only (potentially) lose your initial investment. They buy the risky shorts, sell calls, derivatives, …. not you.

You buy “SDS” or a similar fund at a lower price and hope it goes up. AS IF it were a stock. My personal investment in the SDS fund has gone from $25/share to $29 a share as the market has crashed.

Chart: imgur.com/gallery/mV6hC09

When the S&P goes down, “SDS” goes up. Likewise if the S&P goes up, “SDS” will go down. FAST. It’s leveraged, approximately 2:1. You win big or lose big.

2:1 not enough leverage for you? They have one that’s 3:1. Make money fast or lose it fast.

An investment in SDS or similar should only make up on a part of a BALANCED portfolio. In a bear market that might also bonds, physical gold or a GOLD index fund, cash, plus any biostocks, vaccine companies you think might buck the market. Netflix & Clorox, lol!

Are index funds without their own problems? Of course not!

www.investopedia.com/stock-analysis/2009/the-painful-truth-about-leveraged-etfs-sds-sso-uyg-skf0710.aspx

Honestly I did not FULLY understand all of these problems when I originally wrote this article, but if you read through the comments, another Redditor has done a GREAT job of clarifying such things as “beta decay.”

You can (and should) download a prospectus on any investment you intend to make and AT LEAST try and read and understand it.

www.proshares.com/funds/prospectus.html?ticker=SDS

FWIW, SDS is one of SEVERAL funds offered by Proshares that tracks inversely with different markets Their funds offer differing amounts of “leverage,” the market they track, etc.

I was at one time a licensed broker. I am not now. Use your own judgement. Don’t do anything just because a stranger on the internet tells you to, ok? I am simply trying to inform casual investors that there IS a way to earn money in a declining market BESIDES “risky”short selling.

Most important: Do not ever make ANY investments you do not personally understand!!! Keep reading and researching until you are COMFORTABLE with any investment “vehicle” you intend to buy or sell. Or find a broker you trust. (lol…)

About brokers: If they know so dang much, why don’t they invest their own money and get rich instead of dialing the phone all day begging YOU to let them manage YOUR money. Being a broker is a job, nothing more. They live on commissions by convincing you to buy and sell often. Their best interests and yours MAY OR MAY NOT OVERLAP.

Of course it’s all peaches and creams when the market goes up for 12 straight years. Now is the time when it gets sticky…

There’s gonna be a lot of bad news in the coming days, due to the pandemic. I personally can watch the market headed down knowing its decline is putting a few extra bucks into my account. Hopefully I’ll be alive to spend it.

TL;DR: An investment in a specialized “negative” index fund like SDS will make you money when stock prices go down (S&P index.) It’s “safer” than shorting stocks or options trading, the traditional methods of making money in a bear market. Leave those to the pros!

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.