How to make money in a down stock market or crash

The purpose of this post is to free you from feeling that money can only be lost in a bear market. Actually in stock market crashes people get rich.

The best way to make money in a down stock market for most people is be mostly in cash. Why? I have seen too many people lose money with put options or selling short.

However, if you really want to know the secrets to out smarting Wall Street professionals read on.  You have to have a systematic approach to investing if you are playing the downside. This is because the stock market trends up more than it trends down. And once a stock market is in a very strong bull market, it could take years before this trend reverses.

Further, bear markets are shorter lived and often fall or crash fast, you have to react fast. The bottom line is you have to know what you are doing.

Unless you are a professional trader investing means participating in the growth of the economy and good companies in the long-term. But if you really want to make money in a stock market crash here goes.

Stan Weinstein and bear market investing

In my mind Stan Weinstein was a genius in terms of laying out a clear strategy for investing for the average guy. I recommend his book, Secrets For Profiting in Bull and Bear Markets. His book tell you how to outs smart wall street or any other market you want to invest in. I would start here ans use this book as your guide during decline in the market.

I use a modified version of his system outlined here how to predict the stock market.

  • Use the 12 month moving average compared to the S&P 500 index to predict the trend of the market. If it is above the moving average be long, if it is below the market be short or out of the market.
  • Use MSN stock selector to narrow your universe to the ten best and worst stocks.
  • Do not use margin or leverage until you are comfortable trading with this system.
  • If you consistently earn good returns with this use two-year LEAPs (long-term equity options) or just options (although they have a fast time decay) to increase your return.

Market neutral investing

I use one added twist to the above strategy. I sometimes play both sides of the equity market.

There are many people who be as if believe in market neutral investing is too complex for them.  They believe it is a very complicated form of investing, left to quantitative analysis and portfolio managers. However, if that is true then why do some many portfolio mangers do so poorly?

These fund managers use stock options both put and call or sell short covering with options. I recommend some simpler ways.

Here is s simple alternative to trade in a down market or be market neutral:

  • One simple way to do this is be 80 percent bull if the market is above the moving average and 20 short. Make sure you really pick good shorts, companies that quantitative dogs. If it is a bear market be 60 percent short and 40 percent long. This is an asset allocation strategy.
  • If you want to stay away from options and shorts, invest in negative beta stocks for bear markets. Use MSN stock screener to guide you. There is a universe of stocks that move against the market. Therefore, if you think there is a bear market just load up on good quality negative beta stocks. Remember to use a cheap discount broker with good execution. What good is a cheap trade if you get a poor price. I use Scottrade.
  • Another way to play the downside is find asset classes or countries that are counter cyclical. Asset classes such as commodities, or real estate in the US stock market is going down. The whole world does not move in tandem.
  • Keep your asset allocation simple and simply adjust the level of cash you have on hand.
  • Dollar cost average your assets even on the way down, when the market returns your cost basis from its market decline you are in better shape.

My favorite way is to simply use MSN stock scouter to choose some top stocks and hold some negative beta stocks that rank high. Therefore, you do not need to get into options, shorts, and complicated trading. You are 100% long but just playing the beta compared to the trend and adjust your allocation percentages on this technical trend. But they must be good stocks. Let me know what you think about making money in a down stock market? I think if you are a disciplined investor with this strategy you will beat the average and hedge against loss no matter what the direction of the market.