If the Stock Market Crashes, These Four Investments Will Put You on Easy Street

10 | By Shah Gilani

It’s easy to make money when stock prices are rising.

Just invest in one of the 5,000 stocks listed on major exchanges or one of the hundreds of exchange-traded funds (ETFs) that are already available – with more being added almost every day.

But if you want to make money when the stock market goes down, it’s just as easy.

Maybe even easier.

Just buy shares in one or all of the four “investments” I’m going to tell you about today…

More Pain Means More Gain

In last week’s report How to Make Money in Any Kind of Market,” I introduced you to the “short” side of the market – and explained how shorting strategies would allow you to cash in when stocks, bonds or other assets fall in price.

Indeed, there are lots of ways to make money when things go down. But just knowing about the three most popular strategies to play price or market declines is enough for you to cash in on the next stock that plunges on disappointing earnings – or on the next bear market in blue chips.

As I told you, those three key “short-side strategies” are:

  • Selling short, more commonly known as shorting.
  • Buying inverse ETFs.
  • And buying put options.

I gave you the overview on “shorting” the last time we talked. And I promised that I’d return with an inside look at inverse ETFs.

I’m keeping that promise today.

Grabbing Profits

When I talk to investors, one of my main messages is that “there’s always a place to make money” – with any kind of asset… and in any kind of market.

And short-selling is a core piece of that belief.

In fact, investors who aren’t at least considering short-side trades are missing major profit opportunities – in essence, leaving lots of money on the table.

ETFs are packaged products that trade all day like stocks.

You can buy them… sell them… and short them.

And there are hundreds to choose from.

Inverse ETFs are a category of exchange-traded funds that do the opposite of what an underlying portfolio or index does.

When markets fall, inverse ETFs rise in value. And the steeper the market drop, the bigger your profit.

Here’s what I mean.

Outperforming “Mr. Market”

The “stock market” is a generic term for all stocks that trade on a specific market or exchange, in an index or across all exchanges.

Here in the United States, there are different measures – or representations – of what we think of as the “stock market.” The most popular measures for “the market” are indices that track 30 stocks, or 100 stocks, or 500 stocks or 2,000 stocks.

You know these indexes as the Dow Jones Industrial Average (a 30-stock index of blue-chip companies), the Nasdaq 100 (a 100-stock index with a tech focus), the Standard & Poor’s 500 Index (S&P’s broad index of 500 stocks) and the Russell 2000 (an index of 2,000 small-cap stocks).

If you think the stock market, as measured by the Dow, is going higher – and you want to make money on the anticipated rise in share prices – you can buy all 30 stocks in the Industrial Average. You can do the same thing with the Nasdaq 100, the S&P 500, or the Russell 2000.

But there’s also a way to cash in on the surge in one of those indices – get the exact same performance, in fact – and do so without buying any shares in the actual companies that make up the index.

That’s because there are ETFs that track each of those four major indexes. You can buy shares in an ETF that tracks any of those benchmark indexes and make money if “the stock market” – as measured by the index you choose – goes up.

As we all know, however, stocks don’t only rise in price.

They also fall.

If you owned an ETF that tracked the market, and you began to believe that the market was going to fall, you could easily sell your ETF shares.

That’s a “defensive” move – one that would let you keep the profits you’d already booked and avoid the losses that accompany a market decline.

But what if you believed the market was going to go down a lot – and wanted to be opportunistic?

If you thought the market was headed for a substantial decline, you might start by selling the ETF shares you hold “long.”

And you’d follow that move by shorting the ETF – selling it short.

Let’s face it: A move like this isn’t for everyone.

Some people just don’t like to short. And some investors can’t short because their money is held in an IRA or some other type of account through which they can only buy stocks.

But I see the “short side” as a slice of any complete investing game plan.

And that’s where inverse ETFs come into play.

Picking Winners

There are all kinds of inverse ETFs, including inverse plays on the Dow Jones, the Nasdaq 100, the S&P 500 and the Russell 2000.

As we’ve already demonstrated, an ETF that tracks the Dow or S&P 500 goes up in price if the underlying index goes up. And if the underlying index goes down, so does the ETF that tracks it.

As the term implies, an inverse ETF works in the opposite manner. If the Dow, or the Nasdaq 100, or the S&P 500 or the Russell 2000 rises in value, the share price of the inverse ETF drops.

But when the market goes down, an inverse ETF goes up in price. So if the Dow or S&P 500 sells off – and you’re holding shares of the associated inverse ETF – you’re going to cash in.

That’s how you can make easy money when the stock market drops.

Let’s take a look at some key examples.

If you’re expecting a decline in the Dow Jones, you can buy shares of the DowProShares Short Dow30 (NYSE: DOG), the ETF that rises in price when the widely followed 30-stock blue-chip index stumbles.

Retail investors follow the Dow. But when looking at broad-market topics, institutional investors tend to focus on the S&P 500. And the ProShares Short S&P 500 (NYSE: SH), is an inverse ETF that goes up in price if the S&P 500 does down.

Let’s say you’re concerned about tech stocks, which have experienced quite a run. The Nasdaq Composite Index set a new all-time high late last month and has zoomed to a 20.5% gain over the past 12 months – close to double the 11.5% advance posted by the S&P 500.

To pull down profits if tech stocks nosedive, you can buy shares of the ProShares Short QQQ ETF (NYSE: PSQ), an inverse ETF that goes up in price if the Nasdaq 100 goes down.

There’s also the small-cap sector, represented by the Russell 2000, an index whose 7.6% return over the last 12 months has lagged both the Nasdaq and the S&P.

If you’re projecting a sell-off there, you can buy shares of the ProShares Short Russell2000 (NYSE: RWM), an inverse ETF that goes up in price if the Russell 2000 goes down.

Each of these inverse ETFs is designed to move about as much, on a percentage basis, as the underlying index it tracks – only in the opposite direction.

Besides regular inverse ETFs, there are “leveraged inverse ETFs” that move two times and three times as much as the underlying indexes they track.

These leveraged inverse ETFs are not as straightforward as the conventional “1X inverse ETFs” that we’ve talked about here today. Indeed, they can be quite tricky, so I’ll get into them another time.

But the lessons we’ve talked about today are straightforward.

Making money when the markets go down can be easy – especially when you use inverse ETFs to make your trades.

We’ll be looking at more pieces of short-side trading – and other profit strategies – in reports to come.

In the meantime, feel free to post comments or questions below: I always like hearing from you.

[Editor’s Note: We encourage you all to “like” and “follow” Shah on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then bank some sky-high profits.]

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10 Responses to If the Stock Market Crashes, These Four Investments Will Put You on Easy Street

  1. Terry Freeze says:

    Which of the inverse etfs have historical yielded better results in down markets? i.e.2008 crash?

    • Joel Hamilton says:

      Hi, I am looking to invest in Inverse ETFs. I want to know which one will make the most profit in a down economy.

  2. mike cieply says:

    Can’t say you are really in the market, if your not implementing the “short” stock play strategy. Its definitely not for everyone, but for the “smart greedy” if I may borrow a term. Thanks for the report. Exciting investment opportunities are every where. I definitely want to make a short play,.. “shortly”…

    mike from Indiana

  3. Ann Coletta Doyle says:


    How long have the DOG and ETFs been available for investors in
    the market? I know your explanation is straight forward, but the
    mechanics of the market are questionable, because this allows
    great control for those who can afford to aleady have everything
    set up in the “dog” before the, shall we say, “downturn” ?

    So many games within the big Indexes today. I would guess computer
    technology has created this fury of ups and downs and ins and outs.
    Ultimately, do these various games create a “transgender” market?
    Is there any protection of the value of true currency?

    Ann D., Shanghai

    • Charles says:

      DOG has existed since approximately June 2008. All you have to do to determine this is:

      pull up the chart for any quote, and select max from a good stock charting program.

      It really is THAT simple, and if you can’t figure that out, you really shouldn’t be putting money in the stock market. You will lose everything. Don’t ask how I know.

  4. Yoma says:

    I have a taxable account full of free fidelity etfs(no inverse or leveraged). It is up 14%. The ETFs have been in my account for over one year now. Why should I not sell the entire portfolio(35k) and put my 14% gains back in the market when it crashes(if it does. Otherwise, my money will just sit without any interest). I would like to know from the experts if I am wrong or should I just let my ETFs go down with the market and not worry about interim losses. I don’t need the cash right now. Basically my question is – whether long term holding of ETFs through market fluctuations is better or not. Is there any flaw in the strategy of selling for 14% profit?

    Thanks and look forward to hearing from you!

    • Gabriel says:

      Hi Yoma, I just read your comment and was wondering the same thing now. I have nice gains and am considering pulling half my positions out to realize those gains and buy back in on a market correction or crash… which I successfully did in January / February of 2018 with the nice little market correction then.

    • Kari says:

      Yoma, the first answer is that nobody knows if/when there will be a correction, collapse, or full blown crash. That’s pretty much the reasoning you wouldn’t just sell and buy back during the bottom, as nobody knows where the bottom may be either. If we all did, the market wouldn’t really work and just plain wouldn’t be a market. If you sold today, you may side step a crash, but if there were to be a great rally, that could be your bigger loss while on the sidelines. Certainly don’t listen to the talking heads on most all TV as they are only smoke and mirrors. If you do have knowledge and years of experience, many tools, and some luck, you may be able to see what would look like the most likely outcome in the near future but remember just how long the markets can remain irrational;)
      You can attempt to replicate something similar to what has already been suggested by taking some or all off the table. If you’ve made ~14% in a little over a year, that’s great. However, remember what the market did over that exact time period and compare your gains with that of the overall markets. If there is a collapse/crash, your ETF’s will certainly go down with it and w/out a stop loss on your ETF’s in a panicked crash, you will most likely have a difficult time trying to sell them in order to preserve anything much of what you have. Further more, ETF’s are in fact derivatives, as Shah has written about in the past. Even with a stop loss in place on your ETF’s, you may be lucky to get filled and out of your ETF’s at your predetermined lesser price. It very well may end up taking longer and filling your stop loss order somewhere below the price or % drop you had set up…How much lower, I haven’t a clue.
      The entity running any particular ETF is not going to be the one buying your shares of stock it contains back from you, especially in a panic sell off. Because ETF’s are owned by many and can contain multiple stocks, instruments, etc., the individuals running the ETF are almost certainly going to have an incredible time selling back each stock etc. w/in the ETF you and many others own multiple shares of as opposed to you being able to utilize a stop loss or simply hitting the sell button on any individual stock(instead of an ETF) yourself through your brokerage. When there’s a demand for more of an ETF, they can simply have more shares ushered in but they’re not buying back the shares themselves and will have issues moving those shares back for you if you want to sell or your stop loss is hit in any panic selling. A stop loss on your ETF’s a good while ahead of time is a better choice but not necessarily a given that you’ll get out in time before it’s further down than you had imagined.
      The buying of an inverse ETF, of which there are many, is how to better balance your portfolio from seeing a larger loss in a crash. As your “regular” investments go down, enough of your already bought shares of an inverse ETF will go up. This way, your portfolio doesn’t incurr such a bad decline. The more shares you are able to pick up of an inverse ETF or even multiple ones while the overall market is higher than lower, will cost you less per share and better off set any serious declines.
      Shah may point out, in his next article on inverse leveraged ETF’s how leveraged inverse ETF’s can work well in combination with utilizing options due to leveraged ETF’s resetting their instruments daily and almost always not a great choice to simply own, add to, and hold onto like a 1:1 ratio inverse ETF(ie, DOG, SH, PSQ, RWM).
      Hope that’s not too confusing, long, and helps. Read anything and everything you can find that Shah has ever written about. I’ve found it helpful to reread, multiple times, the knowledge he shares with us. I remember services no longer available like, Short Side Fortunes and Capital Flows but Wall Streets Insights and Indictments have been around since at least then from what I remember. Always read and retain everything possible from these articles and, if possible, search back in time for his past work.
      ***Now would be a wise time to join The Zenith Circle and/or The Money Zone, which are both ran by Shah.***

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