Stock prices have cascaded downward persistently since the nominal high in the Dow Jones Industrial Average (and in other Indexes) in October 2007. Many of the major Indexes have fallen below their spike lows of last August 16, which we consider significant; and this week, the Dow Industrials and the S&P 500 fell below their August 16 lows as well, and have continued to drop. Today has started with a corrective bounce, which was expected, because the markets are severely oversold.
What is a stock market Investor to do when the market turns against him? The better question is "What should he have done BEFORE the market turned against him?" "Timing is everything."
Most Investors have a fixed belief that the only way to make a profit in the stock market is to be invested during a time of price increases. That is false. There are great vehicles available not only to protect invested capital when markets turn down (such vehicles being in the nature of "insurance"), but also to make a profit when they do so. A great many people do not know that such vehicles even exist.
There are countless mutual funds on the market which are geared to making money when the markets rise. Investors should be aware that there are also mutual funds which are geared to making money when the markets decline. Since they work in opposite fashion to, for example, the Vanguard 500 Fund, they are called "inverse" funds. The first and largest inverse Index fund is operated by the Rydex Companies of Rockville, MD. (The writer has no connection of any kind with Rydex). Rydex's inverse S&P 500 fund is geared to INCREASE in value by a dollar when the S&P 500 DECREASES in value by a dollar. (The reverse is also true). Rydex offers an entire family of mutual funds, many of which are inverse funds which have other Indexes as their basis - the NASDAQ 100, for example. Other well-regarded companies offer inverse funds, as well.
Taking the Rydex inverse S&P 500 fund as an example, it is an excellent vehicle to use as "insurance" against a market downturn, for investors who are already "long" in the market. The amount of "insurance" is the investor's decision. It's even possible to calculate the amount of inverse fund "insurance" which would be needed to almost exactly, or approximately, offset the investor's exposure in the market, so that every dollar of decline in the value of the investor's stocks would be nearly offset by an increase in the value of the inverse fund.
Apart from the "insurance" aspect, an inverse fund can also be used for the deliberate purpose of making a profit from a downturn in the stock market, just as one might "go short" in the market itself. One advantage to using an inverse mutual fund is that the investor can never be subject to a margin call.
There are other devices, too, for protecting an existing stock investment from a downturn, such as going short on an exchange-traded fund which is geared to the Nasdaq 100, or purchasing shares outright in an inverse exchange-traded fund similarly geared, or purchasing Put options on the NASDAQ 100.
But for the investor who has an existing portfolio of stocks, and who doesn't have the luxury of watching the progress of the stock market all day every day, an inverse mutual fund is an excellent device to consider, in order to help protect his investment while at the same time offering the opportunity to make a profit if the market declines. Intelligent timing is essential. Recognizing that profit can be made regardless of the direction of the market, it helps to have the benefit of knowledgeable analysis - a compass, a GPS if you will, not merely guesswork such as a wet finger held up to the wind, to gauge the probable next major direction of the market. | 
