How to Profit From a Falling Market
February 16, 2010
Most investors when the market falls sit hopelessly watching whilst their capital simply dissipates. The unfortunate part of a falling market is that shares go up by the stairs and down by the elevator, however the opportunities to make quick gains from a falling market are far easier than a raising one. Most investors think that the only option really available for clients is to park their money back into cash, but this only preserves capital and does not allow the capital to appreciate so they are simply trending water as opposed to growing their net worth position.
The other interesting point is that we witness falling markets a lot more frequently than most investors realize. In fact large sell offs occur at least on each year 7 on a decennial cycle since 1900 and October 2007 was no different. The other cycle to understand is that every 80 years we see a major correction in the market. For example 1907 forward 80 years was 1987, 1929 forward 80 years 2009. The reality is that this cycle played out 2 years earlier due to the magnitude of the debt which the global markets accumulated during the boom period. Having the foresight to profit in these times rather than panic is one of the simplest ways to maximize profits whilst everybody is running for the hills.
An all rounded tennis player really needs to have both a forehand and a backhand, and investing is no different. Not being able take advantage of both the upside and the downside means that you are giving away free profits simply because you are wanting to only hit the balls on the right side of the court. In fact if you are unable to play both sides then you are really placing your investment strategy in a somewhat dangerous position as you have no emergency strategy with your investment plan. It is also somewhat like having a plan for a bushfire in that if you are well prepared you can minimize risk and potentially capitalize on the event, as opposed to not being prepared and your investment portfolio burning down to the ground.
Savvy investors have a number of ways to efficiently and effectively profit from a falling market via the following instruments- put options, CFD, mini warrants, short selling and futures. Whilst the large majority of these are all leveraged, which can be fraught with danger in a falling market, an inverse, or short exchange traded fund (ETF) however is a potential way to profit without needing to leverage and issues of margin calls or time decay. Short or inverse ETF’s are a fund that tracks an index, but can be traded like a stock. They predominately listed on the US stock market and can be bought and sold at any time with no investment minimum. They are also more tax efficient than managed funds. So to ensure you can profit from a falling market, speak to a experienced financial advisors like JPM Investment Group.