Tips for Investing in a Down Market

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What is going on with the stock market? The answer to that perennial question for late 2021 is, plenty, and most of it is not very good. But savvy investors know that as long as you can make a good guess about the direction of the securities markets, whether up or down, there’s a chance to earn a tidy profit.

Technology stocks, for example, are now at their lowest point since the first quarter of the year, and all the major players in the key indices took a huge beating in early October. Is there one reason for all the price drops?

Rarely does one factor cause such huge losses across the board. In the present case, it’s safe to say that there are at least two culprits: coming hikes in interest rates and creeping, slow but sure inflation. Add to that perfect storm the fact that there’s a current supply chain disruption around the globe while demand for consumer goods of all kinds continues to rise.

So, if you’re a careful investor, what are the opportunities these otherwise dismal situations present to you? How can traders use leverage, smart money management, inverse ETFs, bargain hunting strategies, blue-chips, and gold mining stocks as a work around?

Here’s a list of approaches that will no doubt become more popular as the inflation rate rises, supply chain problems worsen, and national banks in dozens of nations get ready to boost interest rates.

Leverage

For those who know how to cautiously use leverage trading, there are dozens of opportunities in a down trending economy. Leverage allows investors to put up just a portion of the total amount they place on a given transaction.

For instance, if your broker offers you 10:1 leverage, you only need to risk one-tenth the amount of the total purchase. That means you could buy 100 shares of ABC stock for the cost of just 10 shares.

The concept of leverage, and its power to magnify potential gains and losses, works in up and down market situations. So, you’re free to use things like inverse ETFs or funds that short entire exchange indices by putting up just a fraction of the total price of the assets you purchase.

Money Management

Another way to improve trading results is to practice wise money management. For many active investors, that means setting a hard limit on the amount of money they are willing to spend on a given transaction. One common technique is to never use more than two percent of your total available capital when buying a security.

Related techniques involve being very careful to diversify among sectors. This is why so many trading enthusiasts maintain portfolios that include shares of industrial, retail, financial, mining, health care, and other stocks. Rarely do all sectors rise or fall at the same time, so it’s a case of safety through diversification.

Inverse ETFs

Exchange traded funds offer people a way to own shares of a fund that invests in multiple companies, usually all in the same field, like health care or industrial companies. Likewise, there are funds that inversely track various segments. It’s possible to upgrade your results during a down economy by purchasing these inverse ETFs if you believe prices in that particular area are set to drop.

Wait for Bargains

There’s a very old strategy that patient investors use when the general state of the securities markets appears grim. It’s called keeping your powder dry, or going to all cash until prices bottom out. Then, you have the ability to select among low-priced shares that have apparently reached a low, or near low, price level.

If you follow the financial news, you’ll often hear about well-heeled individuals and huge institutions that go to cash when the national or global economy is in a tailspin. They wait, sometimes for months, until the dust settles. Then, they buy up all the bargain shares they can afford.

Consider Blue-Chips and Mining Shares

If you want to boost your portfolio with long-term profit without having to use inverse ETFs or wait for bargains, there are lots of other methods that can deliver good results. Blue-chip stocks that pay dividends are often considered a safe haven choice when the economic outlook is negative.

Likewise, many turn to precious metals, which tend to do well when stocks underperform. One common metal play is to purchase shares of mining companies. It’s an indirect way of staking a claim in the gold or silver niche without having to acquire physical bullion and pay to store the stuff.