Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

July 18, 2002

"Profiting in a Bear Market"

Host: You can make money in a down market. Personal finance expert Jordan Goodman tells you how.

Not everyone is losing money in this vicious bear market. Those who are using techniques to profit as stock prices are falling are enjoying enormous profits. Obviously, it is risky to try to make money from falling stocks, after the market has already fallen so much. But for those sick of watching their portfolios shrivel day by day, here is a quick primer on the three easy ways to profit from everyone else’s misery:

 
1. Buy mutual funds that "short" stocks. Several funds use "selling short" as part of their overall strategy, but three funds exclusively "go short" the market all the time: the Rydex Ursa fund (800-820-0888 or www.rydexfunds.com symbol:RYURX) is an index fund that "inversely correlates" with the S&P 500 index. So when the S&P goes down, it goes up. So far, this year it's up 23 percent. If that’s too tame for you, there is the Rydex Arktos Fund, which bets against the NASDAQ 100 index. That fund is up 43 percent so far this year. And, there is the ProFunds UltraBear Fund (888-776-3637), which doubles the volatility of the S&P 500 on the downside -- it's up 47 percent this year.

2. Short stocks yourself. When you short a stock, you borrow the stock from your broker and sell it right away. If the stock price drops, you buy the stock back and replace the stock you borrowed, and pocket the difference. If, however, the stock rises instead of falls, you have to buy it back at a higher price and can lose your shirt. A simple example: Say, you short 100 shares of a stock at $50 a share. You short it by borrowing the shares from your broker and sell it for $5,000. If the price drops to $40 a share, you then buy it back for $40, or $4,000, and replace the borrowed shares -- and pocket a $1,000 profit. If the stock goes to $60, instead, when you "cover your short," you would lose $1,000.

3. Buy "put options" on stocks or indexes. A put option rises in value when the underlying stock or index falls. You pay a premium for "the put," and the put expires in a few months. If the market falls between when you bought it and when the option expires, you can make a huge amount of money. All you have to lose is all the money you put into the premium in the first place.

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