Lesson #1. There’s a lot of money to be made in falling markets.
Lesson #2. The best time to start doing so is typically (a) after a big drop that breaks the back of the bull market and (b) when you get sharp market rallies, possibly triggered by desperate government efforts to turn the tide.
Lesson #3. Traditional short-selling is too risky for most investors. Fortunately, however, you can profit from a market decline without selling stocks short and without risking a penny more than you invest. You can simply buy exchange-traded funds that are specifically designed to profit from falling markets — inverse ETFs. In fact, with these special-purpose ETFs, you could have the opportunity to earn as much money in a bear market as you’d make in a bull market. You don’t need a special brokerage account. You can buy them like any stock or other kind of ETF. Your goal is simply to buy low and sell high.
Lesson #4. From an early age, we are taught that “up” is good and “down” is bad. So most people don’t like declines. But that kind of bias has no place in investing strategies. Especially in today’s topsy-turvy world, serious investors should learn how to invest in both up and down markets.
Lesson #5. Bernard Baruch’s axiom to never follow the crowd is especially critical. If you follow the crowd, you could end up buying stocks when investors are the most enthusiastic (at the market’s top) and selling when they are the most downtrodden (at the bottom).
Avoid that trap. Even if Wall Street experts or your own friends deride your approach, don’t let that stop you from making rational, prudent decisions.
Lesson #6. You don’t have to be a seasoned expert to make money in the market. In fact, sometimes, those who are new to the world of investing can see the big picture more clearly than veterans who have been cocooned on Wall Street.
You see that the country is not going down the right path. You see foreign markets sinking. In your heart and mind, all that simply does not jibe with the image of a nonstop bull market.
You feel that major corrections, or worse, are still very possible — even needed to restore reason and a sober recognition of reality.
Lesson #7. Whenever a supposedly “powerful” central bank or government agency — in Washington, London, Brussels, Tokyo or Beijing — makes a new announcement to prop up their stock markets or rescue their economy, you can typically expect bursts of optimism in their stock markets.
But especially in the current environment, that could be very deceptive — one of the worst times to buy stocks or regular ETFs and one of the best times to buy inverse ETFs.
Lesson #8. An excellent indicator that many people ignore is foreign currencies. Back in the 1930s, my father tracked the British pound because it represented the world’s dominant economic empire. When it fell, it signaled continuing trouble for the entire world.
This time, a similar indicator is the U.S. dollar against the Japanese yen. When the U.S. dollar falls against the Japanese yen (expressed as fewer yen needed to buy each dollar), that could be a signal of a decline in the U.S. market.
The reason: As we’ve told you repeatedly, the U.S. market has greatly benefited — and may continue to benefit — from a global flight to quality.
We call it the Global Money Tsunami. And as long as that money continues rushing into U.S. markets, it can boost U.S. share prices.
But when it’s diverted to markets like Japan, considered a competing safe haven, it can have the opposite effect — at least temporarily.
Lesson #9. Do not expect profits all the time. In any kind of investing — in rising or falling markets — losses can and do happen. So be sure to keep plenty of cash in reserve.
Lesson #10. Whether it turns out to be just a correction or a lot more, the more durable profit opportunity comes after the market’s decline.
That’s when you can reinvest the profits you make on inverse ETFS — or just use the cash you’ve stashed away — to pick up the highest quality investments at the lowest prices.
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