Keith Fitz-Gerald

5 Secrets for Bear Market Investing

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The Dow Jones Industrial Average (DJI) is already in the bear's grasp. And the U.S. economy may well be headed for a recession. But here's the ultimate irony: Bear market investing offers a direct pathway to the biggest profit opportunities an individual investor might ever see.

History shows time and again that the worst returns come to those who buy at -- or even near -- market peaks, like those of 1928, 1969, 1999 and 2007, when price-to-earnings (P/E) ratios are typically higher than "normal."

Conversely, investors who buy when the days are darkest reap the best returns: Think 1932, 1942, 1982, 2003 and -- take a deep breath -- possibly 2008.

Clearly, at a point when the world looks like it's going to hell in a handbasket, sitting on the sidelines in cash would appear to be the easiest and safest strategy to adopt. But there's one major problem with that kind bear market investing strategy.

This "safety" is an illusion. And the strategy doesn't work.

Here's why.

SPECTATORS ARE A BEAR MARKET'S BIGGEST LOSERS

You see, you can't score if you don't play. And if your bear market investing strategy is to sit on the sidelines during volatile stretches, the odds are good that you'll end up as a mere spectator when stock prices rebound -- meaning, you'll miss out on the big updraft that generates the long-term profits we seek.

The so-called "smart money" understands that many investors panic and race for the exits during bear markets. The shrewdest investors already are positioning themselves for the next round of profits both on the long side through stock or call option buying -- even though those profits may not appear for some time -- and on the short side through put buying, which can pay off sooner with the markets in turmoil.

That's why it's best to stick with a long-term, battle-proven strategy. ...