Bear Markets

There have been many bear markets since trading first began on Wall Street. Bear markets can be quite painful experiences—financially and psychologically—for many investors. A great amount of cumulative wealth may be lost during a bear market. Consider the devastating bear of 2007 to 2009, for example, during which trillions of dollars' worth of Americans' wealth evaporated. On an individual basis, though, some investors will fare very well in that environment while others will experience significant drawdown of their portfolios. It depends on how an investor protects and directs his funds during a down market.

Unfortunately, many typical investors do not know how to generate profits during a bear market environment. In fact, many don't take adequate steps to avoid or minimize losses, let alone profit from the decline. They don't sell short for one or more of the following reasons:

  • They have never heard of the concept.
  • They are fearful of doing so.
  • They don't know how to do so.
  • They can't do so in their tax-deferred retirement accounts.

Thus, in the past, before the advent of inverse exchange-traded funds (ETFs), some investors chose the safety of remaining in cash during a bear market. Many others held their long positions during the decline, suffering significant drawdown of their account equity with the hope of recovering those losses during the next bull market (the buy-and-hold method of investing).

Inverse ETFs are also known as bear ETFs. They are ...

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