In a bad stock market it’s difficult to make money on the upside, but it’s not impossible.
Down markets are tricky. There can be certain sectors of the market that create the downturn, and in this case finding those sectors with strength offer opportunities to buy good stock funds.
Stock Funds for High Risk Investors
There are stock funds that play the downside of the market. These funds are called short funds. When you short individual stocks, these stocks make you money when the stock price goes down. You can also buy stock funds that do the same thing. In fact, some of the more aggressive funds will multiply the downside by one or two times the loss.
For example, if the S&P 500 index goes down one percent, there are stock funds that will return two percent for that day. Again, these funds are not for the weak of heart and you must know the risks before purchasing them.
There are stock funds that focus on a particular group of stocks or a sector within the market. In a really, really bad stock market almost everything goes down, and it’s extremely difficult for most stock funds to make money. But in a bad market there are always some sectors that remain strong.
Sector stock funds can make money in bad markets because people gravitate to strength.
Diversified sector funds are another way to play a bad market. These stock funds will allocate money along a wide range of stocks within the sector and sub-sectors. The key here is diversification. This type of fund may compress your gains, but the lower risk factor is what attracts many investors to these stock funds.
Dividend Stock Funds
These stock funds usually invest in companies that have steady returns and pay dividends. You want to invest in a good quality fund that holds mid to large cap companies.
The theory here is, those companies in the fund earn money in all types of markets – good or bad, so even if the stock price takes a temporary hit you will still make money in the interim from the dividends. When the stock market rebounds, these companies will be the first to see price appreciation.
Foreign Stock Funds
In bad markets not all ships sink at the same time, and there are plenty of foreign stock funds to choose from.
If you go back historically, when the U.S. market took a slam some of the Asian markets actually went up. If you have a global downturn, then all bets are off.
Remember too, you don’t have to invest in just one stock fund. If you want to try your hand at investing in a bad market you can diversify among different stock funds. In this case you can lose in one and still make money in the others; this will still provide you with gains in a bad stock market.