How do you make money when share prices are falling?

switch76

When there's a big fall in share prices like during the credit crunch or dot com bubble, is there still a way to make money?

Or do you just sell all your shares and wait for things to improve?

Lokolo

You can short shares.
You can also buy when its falling, then when/if it rises again, you are more likely to get better profit.

switch76

Lokolo wrote: »

You can short shares.

How do you go about doing that?

datostar

switch76 wrote: »

When there's a big fall in share prices like during the credit crunch or dot com bubble, is there still a way to make money?

Or do you just sell all your shares and wait for things to improve?

If you sell your shares at a low point the paper loss becomes an actual loss. If you then buy them back in a rising market it costs you even more.
A former colleague of mine invested his entire pension commutation lump sum in a single unit trust a month before the notorious 1987 Black Monday crash. They halved in value over a few days. He panicked and sold them, losing half his money. Two years later they were worth more than when he bought them.
This is why all the experts point out that shares are a medium or long-term investment.

MyLastFiver

You spread your risk by owning many companies, and a range of different asset classes, not just shares. You smooth out the peaks and troughs by pound-cost averaging. You aim to "be" the market rather than attempt to "beat" (time) the market. This means that shares should be viewed as a long-term investment.

You do not sell after a crash then wait for prices to rise again, because this is "selling low and buying high", because this guarantees you a loss, and is the opposite of rational and profitable investing.

switch76

During the credit crunch, share prices were falling for 6 months or more. It wasn't just a 1 day fall then recovery.

If you see that prices are falling, wouldn't it make more sense to sell, then wait for the market to bottom out before buying again?

Aegis

switch76 wrote: »

During the credit crunch, share prices were falling for 6 months or more. It wasn't just a 1 day fall then recovery.

If you see that prices are falling, wouldn't it make more sense to sell, then wait for the market to bottom out before buying again?

How can you tell when it's bottomed out? How can you tell that a market is starting to fall for a prolonged period rather than showing a short term blip?

Timing the market isn't easy.

StevieJ

You could always try a fund like this.

http://www.h-l.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/jupiter-absolute-return-accumulation

MyLastFiver

switch76 wrote: »

During the credit crunch, share prices were falling for 6 months or more. It wasn't just a 1 day fall then recovery.

If you see that prices are falling, wouldn't it make more sense to sell, then wait for the market to bottom out before buying again?

Well, OK, but you're arguing with the benefit of hindsight.

Very few people, including the finest minds in global finance, with their charts, their software and their armies of analysts, predicted the crash of October 2008, nor its severity and longevity. If it was easy to predict the right time to sell up and go into cash for a while, everyone would have done it!

And as for buying at the bottom of the market, the same applies. Who knows where the bottom is?

You may as well look at a history of roulette spins then say "why didn't I bet on black during that run of black numbers?"

If you really can time the markets this this way, then you will make a lot of money, and will you please be my broker? But for the rest of us, diversification and patience is the key.

MyLastFiver

Aegis wrote: »

How can you tell when it's bottomed out? How can you tell that a market is starting to fall for a prolonged period rather than showing a short term blip?

Timing the market isn't easy.

You beat me to it

switch76

I guess timing is everything.

How many other major falls have there been over the years? Were they sudden or gradual?