How to Make Money When Markets Are Falling: 4 Ideas in 2024

A market correction or recession is never a pleasant time to be investing.

When investors are panicking and selling their investments, a lot of assets tend to become more correlated or fall in value together.

We will outline how to make money when markets are falling and discuss four ideas below, as well as when it makes sense to implement them.

Bonds and Stocks: The Typical Portfolio Diversifiers

Bonds are a key component to building a robust portfolio because they are typically negatively correlated to stocks. This means that went stocks are falling, bonds are usually rising in value, and vice versa.

There are certain situations in which this is not always the case. Stocks prices are usually driven by several factors, including:

  • Overall investor sentiment
  • Company earnings
  • Availability of capital

Bonds have a few other inputs that factor into their price, which include but are not limited to:

  • Credit rating upgrades or downgrades
  • Interest rate movements and expectations
  • Overall demand for investments paying fixed income streams

In a scenario where markets are falling and interest rates are rising, such as the first half of 2022, bonds and stocks can fall in price simultaneously.

This does not mean that investing becomes futile in the short term. Making money when markets are falling can be done by targeting key investments that are relatively outperforming.

Some investments which have historically performed well during periods of market stress include:

  • The US dollar as a currency
  • Precious metals such as gold
  • Long-term government bonds (assuming interest rates are falling)
  • Case-by-Case investments based on current conditions

How to Make Money when Markets are Falling: Four Ideas

Becoming more tactical with your portfolio is a great short-term approach for trying to make money when markets are falling.

While you should broadly stick to your investment plan and asset allocation which is determined by your goals and objectives, minor changes can be made to improve returns during market corrections.

Idea 1: The US Dollar – A Strong Performer throughout Market Volatility

Idea 1: The US Dollar - A Strong Performer throughout Market Volatility

The US dollar is broadly seen as a safe-haven currency. When global markets become volatile, demand for the US dollar generally increases, which causes its price relative to other currencies to increase.

If the value of the US dollar is rising against other currencies, it can help to protect on the downside.

Consider the following example:

Investor A holds Euros, for an equivalent total of $1 million US dollars
Investor B holds $1 million US dollars

Global markets enter a severe recession, and the US dollar ends up strengthening against the Euro. This means that Investor B will still have $1 million US dollars, but they are worth more than Investor A’s initial Euros (which were worth $1 million US dollars before the currency movement).

As a Canadian investor, holding investments in US dollars can provide a slight cushion against market downturns. This is especially true if you consider your total return in Canadian dollars.

Another example is the following:

Investor A holds shares in a Canadian tech company, which fall by 10%
Investor B holds shares in a US tech company, which fall by 10% as well

The US dollar has risen in value by several percentage points against the Canadian dollar.

With a stronger US dollar, investor B can sell his or her US shares, and lose less money once converting back to Canadian dollars (because the US dollar is now stronger and worth more CAD than before).

If you are an investor that has always invested domestically, consider the merits and benefits of investing globally, especially in the US.

Ideas 2: Considering Precious Metals such as Gold

Ideas 2: Considering Precious Metals such as Gold

Gold is another asset that is often considered a safe haven. Although there have been some corrections in which gold did not perform as well, it is generally a sound investment when markets are falling.

There are a few key factors that affect the price of gold to consider.

The US Dollar and Gold Prices

Gold is generally dollar-denominated, meaning that its price is quoted in US dollars.

The strength of the US dollar and the price of gold are usually inversely related. As the US dollar strengthens, the price of gold will generally fall, and vice versa.

Given this relationship between gold prices and the strength of the US dollar, gold may not be a very strong performer when markets are falling. This is especially true if the US dollar appreciates rapidly against other currencies.

Interest Rates and the Price of Gold

Gold as an investment does not pay owners any dividends or coupons. It is considered a yield-free asset. Returns from investing in gold are entirely from capital gains – buying physical gold or a gold fund at a lower price and selling it higher.

Investing in anything requires considering alternatives. If interest rates are broadly rising, bonds will become available to investors that pay a higher coupon or annualized yield. This makes investing in gold less attractive, relative to alternatives.

If markets are falling and interest rates are rising, upward momentum on gold prices can be fairly modest.

Despite both the currency and interest rate inputs into the price of gold, it has still performed relatively well during periods of falling markets.

Idea 3 – Long-Term Government Bonds (Given Falling Interest Rates)

Idea 3 - Long-Term Government Bonds (Given Falling Interest Rates)

In most severe market corrections, central banks around the world will be working to soften the blow from falling asset prices on investors. Typically, this will be done by reducing interest rates.

Interest rates and bond prices are usually inversely related. When interest rates fall, bond prices tend to rise, and vice versa.

The impact of interest rates on bond prices is usually greater if the bond has a relatively longer maturity date.

When choosing between government bonds or corporate bonds, government bonds are a clear winner when markets are falling. This is because of a flight to quality.

In a situation where markets are falling in tandem with interest rates, long-term government bonds are likely to be performing well and can be a great asset to consider for your portfolio.

Idea 4 – Case-by-Case Investments Based on Current Conditions

Idea 4 - Case-by-Case Investments Based on Current Conditions

Market downturns are rarely caused by the same catalyst over time. The 2008 housing crash was primarily caused by bad lending within the real estate sector in the US.

The 2020 COVID-19 sell-off was caused by a global pandemic that decimated demand for most goods and services.

The 2022 inflationary tech sell-off has been caused by rising prices and rampant inflation.

There are generally certain sectors or investments that relatively outperform or even perform exceptionally well if you are able to spot them early on.

2020 COVID-19 Sell-Off

With regards to the 2020 COVID-19 downturn, stay-at-home stocks were strong performers. Some examples of such companies include Netflix, Zoom, and DocuSign. While the broader market was experiencing a deep sell-off, these companies performed exceptionally well.

2022 Tech Sell-Off

In the 2022 inflationary tech sell-off, there are again certain sectors of the economy that have done well. Given high levels of inflation, sectors such as oil & gas and materials have done well for their investors. Some examples of stocks here include Exxon Mobil, Suncor, and Mosaic Co.

Targeting key sectors or investments which will perform well despite the broader market downturn will provide you with excellent relative results.

The main difficulty here is being able to find these relative outperformers early, before they may have already appreciated in value.


How to Make Money When Markets Are Falling

As an investor, it is critical to understand that bull and bear markets are natural occurrences over time. While it is generally pleasant to be an investor throughout a bull market, bear markets can be more difficult to stomach.

Tactical changes to a portfolio, as a result of falling markets, should not contradict your overall investment plan. Trying to time markets is an extremely difficult task.

With that said, implementing ideas that do well during market downturns early on can help with your portfolio’s performance.

These can include the US dollar as a currency, precious metals such as gold, long-term government bonds, and case-by-case sector investments.

Always be mindful of your objectives, risk tolerance, and constraints when investing. Throughout an economic recession or depression, circumstances can change drastically.

Having a well-established investment plan in place can help with long-term performance and achieving your goals.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Read about how he quit his 6-figure salary career to travel the world here.

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