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What To Buy When The Stock Market Goes Down

|Includes: SPDR S&P 500 Trust ETF (SPY)

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The stock market doesn't go up in a straight line. There are always periods of time during which the market gives back some - or a lot - of its gains. Because the average stock goes down three times as fast as it goes up, you can make a lot of money, relatively quickly, if you can spot great opportunities to bet against the market.

Many at-home investors have a "long only" mindset; that is, they only buy stocks. Whether it's due to account restrictions or personal philosophy, these investors never sell short - and there's nothing wrong with that. But a "long only" mentality can only get you so far. Years of gains can be wiped out in a matter of weeks if investors don't hedge against their long positions. My goal in writing this article is to help the everyday, "long only" investor find the right securities to buy - not sell short - when he or she thinks that the stock market will go down.

Inverse ETFs

A great way to profit from a market decline is to buy inverse ETFs. An inverse ETF is an exchange-traded fund designed to perform as the inverse of the index or benchmark it tracks. Like traditional ETFs, inverse ETFs can be leveraged, meaning that they can mimic one, two, or even three times the daily performance of an index or benchmark.

For example, SH, an inverse ETF for the S&P 500, reflects -100% of the daily performance of this stock market index. For every 1% the S&P 500 goes down, SH goes up 1%. On the other hand, SPXU is an inverse ETF that reflects -300% of the daily performance of the S&P 500. It is designed to go up 3% for every 1% decline in the S&P 500.

There are many ETFs that cater to all sorts of investment styles, risk tolerance, and market outlook. In general, however, it is not wise to buy and hold inverse ETFs for an extended period of time. I advise holding inverse ETFs for no longer than two to three weeks. At the end of the day, inverse ETFs are financial instruments that allow one to hedge against a portfolio, and should not be seen as outright investments.

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