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The Dow Jones Industrial Average's nearly 9% drop to start 2016 has investors nervous that a stock market collapse is coming.
A stock market collapse is a sudden decline in stock prices across multiple sectors. It is often driven by fear and panic. That differs from a market sell-off, which entails a brief pullback in stocks as institutional investors take profits.
The most recent example of a stock market collapse was in 2008.
On Thursday, Oct. 10, 2008, the Dow fell nearly 700 points after the opening bell, adding to a 21% drop for that week. During the same week, the S&P 500 also declined almost 20%. This was the result of over a dozen big U.S. banks failing in 2008. That sparked a flurry of capitulation – or panic selling – as investors frantically exited U.S. stocks.
Fortunately, there's no reason to expect a stock market collapse right now. But Money Morning experts do caution that we are in a bear market…
This Is a Bear Market, Not a Stock Market Collapse
A bear market is serious, but it shouldn't cause the same panic as a stock market collapse.
We've just finished the longest bull market run since World War II. Over the last six years, the Dow climbed from 6,626 to 18,024, and the S&P 500 rose from 683 to 2,108. A cool down is long overdue.
It's important to remember that bear markets are a part of the stock market's natural cycle.
Money Morning Global Credit Strategist Michael Lewitt went into the messy details about how this bear market began.
"China is a house of cards whose debt-engorged economy hit a wall in mid-2014 after seeing its total debt grow from $7 trillion in 2007 to $28 trillion (it is now probably over $30 trillion)," Lewitt said. "This then caused global commodities markets, which were inflated by the Chinese debt explosion, to collapse."
"The last piece of the puzzle was the end of the Federal Reserve's quantitative easing (QE) program in October 2014 and the beginning of its effort to raise interest rates in 2015, though this didn't occur until last December and is more likely than not to be reversed in 2016 if markets continue to sell off and the U.S. economy continues to weaken."
Lewitt believes that we haven't seen the bottom of this bear market yet, even after the stock market's triple-digit rally on Jan. 22.
That's why our experts have developed a plan for investors to protect their money during a bear market in 2016, and even profit from the falling market…
How to Invest in a Bear Market
Even when stock prices are trending downward, investors can still make money in the stock market.
According to Money Morning Options Trading Specialist Tom Gentile, bear markets are even ripe with opportunity.
"The bull market's end gives traders the juiciest opportunities ever," he said. Gentile helped his subscribers post a 100% return in the first week of the year, when the Dow declined by more than 900 points.
Every week, Gentile discusses his favorite market moves. Check out a brief introduction to his trading strategy here.
Money Morning Capital Wave Strategist Shah Gilani favors short-term plays during market downturns.
He likes three exchange-traded funds (ETFs) that track the inverse performance of major indexes. These inverted ETFs gain as stock prices decline. Gilani also likes four short-term investments when markets are falling hard during a specific day. Get all of his picks, right here.
For a more long-term approach, Money Morning Chief Investment Strategist Keith Fitz-Gerald favors investing in high-quality stocks that sell products the world can't live without. These are positions that you plan on holding for the next five to 10 years.
"In tech, that includes names like Facebook Inc. (Nasdaq: FB), Apple Inc. (Nasdaq: AAPL), and Alphabet Inc. (Nasdaq: GOOGL)," Fitz-Gerald said. "And select companies like The Coca-Cola Co. (NYSE: KO) that have a long history of increasing dividends through thick and thin. Also, put new money to work in companies like Raytheon Co. (NYSE: RTN)."
Fitz-Gerald explains that stocks like these aren't speculation; they're dependable investments based on stellar earnings reports and balance sheets.
"As long as you're investing money that you won't need to spend in the near term and keep risk management top of mind, you can weather a downturn," Fitz-Gerald said.
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