You can make money when stocks go down. You do this by "shorting." This means you borrow shares from your broker, then immediately sell them. You promise to buy them back later. You're hoping the buy-back price will be much lower than what you sold them for because you get to pocket the difference. If that sounds complicated, you can always put your money in a mutual fund that does the shorting for you.
Shorting the Whole Market
If you think stocks in general are poised to go down for several weeks or months, you can put your money in a mutual fund that shorts the market. These funds select stocks they think represent the entire market.
Among those reviewed by website Investor Place is Federated Prudent Bear fund A.
An article in "U.S. News & World Report" examines 29 such funds, including Grizzly Short Fund, PIMCO StocksPLUS Total Return Short Strategy Fund and ProFunds Bear Gund.
All of these funds specialize in shorting securities. You make money with these funds when the stock market goes down. When the stock market goes up, you lose money in these funds.
Shorting a Market Segment
You may decide that even if the overall market does well, certain industries will not. For example, gold prices could decline. Investor Place lists Van Eck Intl Investors Gold C as a mutual fund that shorts gold. It is headed by a geologist. The website ProFunds names Profunds NASDAQ-100 Fund as one that shorts technology stocks. If you spot another sector that you suspect is getting ready to fall, find a mutual fund that invests in that sector. Those funds include Jack White & Co. and Fidelity Investments, according to "The New York Times."
Doing Two Times Better
Some funds short stocks in such a way that they are calculated to make twice the money you would make in a regular mutual fund that shorts the market. "U.S. News & World Report" identifies Direxion Monthly Small Cap Bear 2X Fund and Direxion Monthly SP 500 Bear 2X Fund as such funds. Note that a short fund that's supposed to make twice the money if stocks go down could lose twice the money if stocks go up.
Going Short and Long
Some funds buy stocks as a long position, meaning they expect the stocks to go up. At the same time, they short other stocks that they expect to go down. Smart Money indicates Diamond Hill Long-Short, Security Alpha Opportunity A and 1st Source Monogram Long/Short as funds that invest in that manner.
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Writer Bio
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.