How to Invest Now After Black Monday Volatility

Investors are reeling after this week's volatility, and many are wondering how to invest now following "Black Monday."

After falling 1,089 points intraday yesterday (Monday) and closing down 586 points, the Dow Jones Industrial Average fell another 204 points today. The Dow Jones is now down 12.1% in 2015.

market crashWhile many on Wall Street are hitting the panic button, Money Morning Chief Investment Strategist Keith Fitz-Gerald is reminding investors to be patient...

"A day or two of bad trading, or even a few months of nasty stuff, do not qualify as a crash," Fitz-Gerald said today. "It's a correction and it's normal. You want the markets to periodically scare the weak money out for the simple reason that chaos always creates opportunity."

"You have to have lower prices before you have higher prices," he continued. "That's why 'buy low and sell high' is what it is... the true path to profits."

Fitz-Gerald also doesn't agree with Wall Street's continued refrain of simply diversifying your portfolio in order to protect yourself from a crash or correction.

"The concept is alluring and basically involves spreading your money around on the assumption that not everything goes down at once," Fitz-Gerald said. "They may as well be rearranging the deck chairs on the Titanic. What they don't tell you is that conventional diversification doesn't work when everything goes down at once."

And the way he sees it, investors can do a lot more than just "protect" their money when the markets are falling.

So for investors wondering how to invest now, Fitz-Gerald has one type of investment that will actually profit when everyone else is panicking...

How to Invest Now: Inverse ETFs Profit When Others Panic

According to Fitz-Gerald, brokers and other "Wall Street experts" love telling their clients to buy and sell in a diversification spree because they make a commission on every trade you make.

"Instead, try investing 3% to 5% of your total investable assets in inverse ETFs because they appreciate even as the rest of the markets get carried to hell in a handbasket," Fitz-Gerald said.

Inverse ETFs are funds that track the inverse performance of an index. They do so by tracking a combination of short-sellers, derivatives, and other leveraged goods.

"Take, for example, the Short S&P 500 (NYSE: SH), which negatively tracks the S&P 500. During the nadir of the financial crisis, from October 2007 to February 2009, the fund returned 59%, while the overall markets saw their values drop by more than half."

Most inverse ETFs have a 1:1 inverse, meaning the ETF will gain one percentage point for every one the index drops. But others have 2:1 or even 3:1 inverses. That means they'll double or triple the percentage points for every point the index falls.

And you don't have to just focus on the U.S. markets. Fitz-Gerald also points to the ProShares Short FTSE China 50 (NYSE: YXI), which is a 1:1 ETF that has climbed 37.3% in the last three months as China's stock market has crashed.

"What I love about inverse funds is that they're investments you buy. That means there are no options and no margin required to own them," Fitz-Gerald said. "That makes them a convenient choice if you'd prefer not to mess with options or simply don't like the concept of shorting - both of which can be used to structure similar inverse holdings to the ETFs we've talked about today."

"I'm also a big fan of these things because they can be used to hedge your portfolio not just when the markets crash, but also ahead of time. Depending on your risk tolerance and objectives, the 1:1 inverse funds can make a great shock absorber for your core holdings."

The Bottom Line: With the markets' extreme volatility in the last week, investors are asking us how to invest now. One of the best strategies is investing in inverse ETFs. They not only work as a great hedge for your portfolio, they will also profit when the markets are falling.

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