To most investors, just surviving a bear market is more important than finding the next jet-fueled growth stock.
But I want to let you in on a secret: Rather than just trying to survive, investors can actually thrive in bear markets.
In fact, I make a lot more money a lot faster in bear markets than I do in bull markets.
After all, stocks and most other asset classes typically fall faster than they rise, because fear is a much stronger motivator than greed.
So if you're not making money in a market like this one – where prices are falling, even plummeting – you're missing out.
It's time to change that. And I'm going to show you how.
Bear Market Funds
The best way to profit from a bear market is to use exchange-traded funds (ETFs) in conjunction with options.
Let's first look at the ETF component.
There are plenty of inverse ETFs that go up in price when markets go down. And for even more oomph, there are "leveraged" inverse ETFs.
You can use these funds to "short" stocks and commodities, without having to open an options account, or rely on a broker.
But remember to do your homework. Make sure you understand exactly what each ETF you're interested in actually represents. Don't just go by the name. Read each prospectus to learn how the fund's investments are allocated and how it's supposed to perform under various market conditions.
Also be sure to check the bid -and -ask spread to make sure it isn't too wide, and the average daily volume to make sure it isn't too thin. I don't trade any ETFs that trade less than 1 million shares a day, on average.
Another thing to keep in mind is that many ETFs make good short-term trading vehicles, but are bad long-term investments. That's because many ETFs don't track their benchmarks precisely. And if they are leveraged, the tracking error widens considerably over time.
Still, these are very versatile instruments. You can buy them in retirement accounts, they are margined the same way stocks are, they are liquid and tradable all day, and you can put in stop-loss and profit -target orders.
Exploring Your Options
The second way to profit from a bear market is through short selling.
I say that all the time and I'm surprised how many people think it's wrong to short stocks.
Trading to make money in a bear market has nothing to do with what's good for the U.S. economy or for America. It's simply a matter of what's good for your net worth.
The old notion that it's un-American to short stocks comes from Wall Street's institutional elite. They don't want the public shorting stocks. In fact, they don't want the public even selling stocks. Why? Because Wall Street wants buyers lined up to pay for the stocks that it is selling short.