What Financial Instruments to Buy When Stocks Fall?

Diversifying away from only stocks before stocks falter can stem losses.

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Investors turn to the stock market to achieve short-term profits or for help accomplishing long-term financial goals, such as retirement. When equities falter, it can reduce the value of an investment portfolio made up mostly of stocks. Luckily, there are other financial instruments belonging to separate asset classes that are not normally linked to performance in the equity markets. Choosing the right ones to buy depends on the length of time an investor wants to have exposure and also the amount of risk he can tolerate.


One reason stock prices fall is that corporate profits, which drive market values, has been compromised. Bonds, also called fixed-income securities, are not driven by those same conditions. Instead, bonds are sensitive to the interest rate environment and the type of economic expansion a region is experiencing. In the decade leading up to 2012, U.S. Treasury bonds, which are among the most conservative debt securities and which are issued by the federal government, delivered returns that exceeded the stock market by 5 percent, according to a 2012 article on the ABC News website.


Under stable economic conditions, commodities, which are contracts representing the price for resources such as energy, precious metals and agricultural products, trade uniquely to equities. When the stock market declines, investors can usually turn to commodities for diversification. The simplest way for retail investors to gain exposure to commodities is via exchange-traded funds or mutual funds. Under certain economic conditions, the line between stocks and commodities becomes blurred. This was the case following the economic crisis of 2008, when trading patterns in commodities were mimicking those in the stock market, according to a 2010 article on "The Wall Street Journal" website.


Real estate investment trusts, called REITs, offer investors exposure to corporate real estate through a single investment vehicle. Although certain REITs trade in the stock market, they do not generally behave similar to stocks. By investing in REITs, investors can earn ongoing and often lofty dividend payments, which REITs, as part of their structure, are required to distribute. REITs were more profitable investments than both stocks and bonds for the three decades leading up to 2011, according to the National Association of Real Estate Investment Trusts' head researcher, Brad Case, cited in a 2011 article on the Fox Business website.


In some cases, the best opportunity in the financial markets is in undervalued stocks even when the markets are falling. Undervalued stocks trade at inexpensive prices considering the type of profit growth businesses have been delivering or are expected to generate. These securities are considered buying opportunities, because market values should increase alongside higher profits. In 2011, as much as one-fifth of the stock market was trading at undervalued levels based on profit estimates, according to Legg Mason Capital Management chief investment officer, Bill Miller, cited in a 2011 article on the CNBC website.