Today, I finalize my series per your question, “Are there securities that go up when the market goes down?” During the 2007-2009 time frame, we saw that the S&P 500 dropped over 55 percent while all four Bear/Inverse funds performed as designed and were up a lot more percentage wise than the S&P 500 was down. Keep in mind that past performance does not dictate future returns.
How should one use these Bear and Inverse funds? My answer: “Very cautiously.” Many buy bond funds and discover how much they underperform during a bull market. Others buy inverse funds and learn how much they go down during a bull market. Either way, while protecting your downside by using either bond or inverse funds during bull markets, you have either an expensive opportunity cost or lose money until the bull market turns bearish.
The solution is to learn the signals for when a bull market turns into a bear. I have featured this chart many times in the past three years. When the price drops down through the blue signal line and stays there for two months, this signals the beginning of bearish times. Per the blue boxes, the last two market tops took several months to develop. Outside of an exogenous event, I would be surprised if it were different the next go around.
The next time this condition repeats, then and only then will I consider buying Bear/Inverse funds that go up when the markets correct and allow me to profit when the market decides to take a plunge. I will also have protective stops to get me out, in case the market whipsaws back into bull territory.
Remember to plan your work, work your plan, and share your harvest!
David England
davidoengland.com
