Money & Investing - Banks.com

Right now, with the stock market in serious trouble, people are wondering what to do with their investments, and looking for other ways to earn money in the market. This reader brings up an intriguing investing idea:

I hear that the stock market is likely to take a rapid dive beyond lows not seen for five years. I have friends that are telling me to pull out stocks and invest in inverse ETFs. What are inverse ETFs?

Investing in inverse ETFs is a rising trend right now because of the nature of inverse ETFs. First, though, it is important to know what ETFs are.

An ETF is an exchange traded fund. Exchange traded funds are funds that are similar to other funds — groups of investments traded as one. However, with an ETF, you trade as though it is a stock. The same rules, commissions and other stock market conventions apply. These are becoming popular because they offer a reasonable chance of growth. However, ETFs are considered risky.

Inverse ETFs

Inverse ETFs offer a different twist. They benefit from “shorts.” Inverse ETFs gain when the market losers. It’s a bet that something will decline in value, rather than gain in value. BloggingStocks offers four interesting inverse ETFs that have especial promise in these perilous times:

1. Short Dow 30 ProShares.
2. UltraShort Real Estate ProShares.
3. UltraShort Consumer Services ProShares.
4. UltraShort Technology ProShares.

These are ETFs that invest in several companies in one sector (or in the case of the Short Dow 30, one index), speculating that the sector will fall overall. The farther the market falls, the more you receive from your inverse ETF.

Of course, if the measures the government is taking work to actually shore up the economy, then inverse ETFs will decline in value as the stock market recovers. But they could make a good hedge for some of the stocks you are riding the market troubled out with. Or, if you have the risk tolerance for it, you could stake your future in earning on inverse ETFs.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: stock market, stock market news, investing blog, inverse ETFs,
reader question, investments, exchange traded funds

Yesterday the stock market ended up, after a wild ride. Although stocks ended on a weekly loss overall, it was encouraging to see that Friday ended in an overall gain, though quite modest. Cara Ellison reports on what helped pull the stock market up yesterday:

A few factors provided that catalyst: the price of crude fell modestly, and the government delivered upbeat economic data, including a surprising rise in orders for durable goods, which helped offset ongoing issues in the financial sector.

Indeed, lower oil prices have also been helping the US dollar as well. Generally good economic news has been providing a measure of support, and there is hope for a rally in the stock market, despite the latest national bank failures.

At the end of the week, here is how the stock market stands:

• Dow: 11,370.69
• NASDAQ: 2310.53
• S&P 500: 1257.76
• Russell 2000: 710.34

Gains made on Tuesday and Wednesday were erased dramatically on Thursday, leading to the overall loss for the week. But Friday marked a valiant rally, helping to limit the weekly loss.

Financials were among the biggest losers, as one might expect at this point. Fannie Mae and Freddie Mac were especially hard hit, along with Wachovia and Bank of America. Investors are looking for the bottom, and every week brings fresh hope that the bottom has been reached. Of course, only time will tell. Other sectors fared better, though, with chemicals companies and communications companies doing a little bit better.

For the next week, investors should be on the watch for additional economic data, as well as considering the fundamentals of their investments.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: stock market, stock market news, investing blog, stock market week,
economy, investments, oil prices

One of the most interesting things about investing is the way that you can earn solid returns through the power of compounding interest. Indeed, as Prieur du Plessis points out on Paul Kedrosky’s Stock Market Returns blog, even Albert Einstein recognized the incredible power of compounding interest, calling it the eighth wonder of the world.

What does compounding mean?

Basically, compounding means that you earn interest on your interest. When your returns are compounded, it means that your returns are added into your principal, and then you earn further interest on the total.

Many people think of compounding in terms of credit cards. This is how credit card companies keep so many people in debt. However, there is a very positive aspect of compounding: as a way for you to increase your earning power through investing.

The secret to compounding: time in the market

Those who use the power of compounding to their advantage do so by making long term investments. Index funds, some mutual funds, solid value stocks and even some cash investments can help you earn a steady income, and enjoy compounding returns over decades.

Earning returns this way — through compounding — has nothing to do with “timing the market.” Those who try to time the market, trading more frequently and aggressively trying to make larger returns, often find their returns eroded by taxes, commissions and other fees. Additionally, it is difficult to consistently time the market is such a way that one regularly beats the market.

For most people, a steady, solid investing strategy involves long-term investments that take advantage of compounding returns. While the returns aren’t huge — right around 7% annually, they are often consistent. And if you keep your investments for two or three decades (or longer — start investing young!), you are likely to find yourself with a tidy nest egg.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: stock market, compounding returns, investing blog, Albert Einstein,
index funds, investments, compound interest