It’s very easy to make money when the market is going up. All you need to do is hold the index and you’re ‘in the money’.
It gets a lot harder to make money when the market is falling. If you hold the index and the index goes down, you’re definitely poorer than you were before.
However, it’s not impossible to make money when the market goes down, here are four ideas:
Own good stocks that keep rising
The index may be going down, but that doesn’t every stock will go down. If you own a portfolio of quality stocks it’s likely that some of those stocks’ earnings and share prices will keep going up.
It’s impossible to say which ones those are – they may be ones that are defensive such as the healthcare industry, or perhaps they’re stocks that benefit from the country being in a dip, like fast food stocks, debt collectors or gambling businesses.
Most businesses on the ASX pay dividends. Share prices may go down but those businesses will likely continue making profits and pay dividnds.
A share price may drop 7% temporarily but the business may be paying out an 8% grossed-up dividend, you would still have made a profit in the short run. This could be entirely possible with a share like WAM Capital Limited (ASX: WAM), which has a grossed-up dividend yield of 9.3%.
Dividends are often much less volatile than share prices, so they are a good way to lessen the blow of share price reductions.
I’m sure everyone has heard the phrase ‘buy low, sell high’. If you’re brave and buy during a market dip then you could be doing yourself a favour in the long run.
You may not be making money in the short-term, but you have entered the market with a low cost base at the right time to hopefully make money in the future.
This tactic can work with almost any company in a dip, as long as it doesn’t go out of business.
This is a very specialised skill that I don’t think many people should use. It’s essentially betting that a share price will decline. If you choose the right stock then it can work.
You have to pay money to the entity you’re borrowing money from and then hope that the share goes down – remember that over the long-term the share market keeps rising, so most shorters are facing a losing battle over time.
Market dips will happen, at least once a year on average. Market crashes will definitely happen too – every decade on average. You can still make money in when the share market falls, just don’t panic and sell everything.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.