Profiting from the Current Market Turmoil

Stock prices have been fluctuating wildly, oil prices are skyrocketing, and while the U.S. Dollar tumbles, gold is rising in value. All this financial turmoil may have you on edge, worrying about your investments, but don't just sit back and fret, grab the bull by the horns and profit from this marketplace mayhem. Here are several ways:

Oil (USO)

One of the most stunning developments this year has been the rapid rise in the price of oil. By some measures, the cost per barrel has increased by 64 percent since January. Skeptics believe that much of this price rise has been due to intense speculation, but there are several good reasons why oil costs have risen: the booming growth of developing countries like China and India (like the U.S., they have an almost insatiable thirst for petroleum); the limited quantity of easy-to-retrieve, easy-to-refine light, sweet crude (other, heavier, crudes cost more to find, pump and process, thereby making them more expensive); and much of the supply is controlled by OPEC, a cartel that purposely restricts output to keep prices high.

If you think oil will rise further in value, one way to benefit from the increase is to buy an exchange traded fund (ETF) that tracks its price. I invested in USO, for example, the United States Oil Fund, which reflects the performance, less expenses, of the spot price of West Texas Intermediate light, sweet crude oil. You can buy and sell an ETF just like a stock, and USO rose ten percent in value two weeks after I purchased it.

Be aware, however, that this can be a particularly risky investment. The price of oil fell 30 percent in the second half of 2006, which goes to show that despite long-term trends, the value of such commodities can still fluctuate wildly. The following (PDF) link features a chart of oil prices from 1977 to 2003:
http://www.ioga.com/PDF_Files/oilpricechart.pdf

Gold (GLD)

Precious metals have also done very well this year. The price of gold has risen more than 30 percent, year to date. Speculators have certainly been behind some of this price rise, but, again, there are valid reasons why gold has risen in value: the fall in the U.S. Dollar (when this currency -- thought by many to be a safe haven -- decreases in value, investors tend to buy gold); the growing number of affluent Chinese and Indians (in both cultures savers like to buy gold); and gold is getting more difficult to extract from the ground (limiting supply).

If you want to invest in gold without the hassles of physically acquiring it, one way to do so is to buy the GLD exchange traded fund. GLD is the Streettracks Gold Shares Trust (a State Street Global Advisors fund) which mirrors the performance of the price of gold bullion, less the ETF's expenses. I purchased shares of GLD and it rose ten percent in a little over a month.

Before you rush to invest in this precious metal, however, note that it too can be very risky. The price of gold reached more than US$850/oz. in 1980, after which it fell in value, to below US$300/oz. in 1998. The following link illustrates this point in charts:
http://goldprice.org/30-year-gold-price-history.html

U.S. Dollar (UDN & UUP)

If you're an American, as I am, and are depressed about the slide in our nation's currency, don't be -- you can profit from this trend. But you may be wondering why it has been falling. One major reason is that the U.S. Federal Reserve has been cutting interest rates (in order to prevent an economic recession), while foreign central banks have been raising theirs. When a nation raises rates, it makes its currency more attractive as an investment, encouraging investors to buy it. When it lowers rates, the currency becomes less attractive. Other reasons for the fall in the U.S. Dollar include the rising relative strength of other economies, such as the European Union, China and India (and, as a result, their currencies) and our continuing problems in Iraq (the dollar has been on an almost continuous slide since the invasion).

There seems to be an ETF for just about everything nowadays and it just so happens there's one that bets against the value of the U.S. Dollar. It shorts the currency, which means the investment rises in value as the U.S. Dollar falls. The ticker symbol for this ETF is UDN (the PowerShares DB U.S. Dollar Index Bearish Fund), and it has risen in value by 12 percent since its inception, in February 2007. (Alas, I only just bought shares, so I can't boast about how much filthy lucre I've earned.)

By the way, if you think the U.S. Dollar has reached its nadir in value and will rise heroically from the ashes going forward, you can buy an ETF that bets that way too: UUP (the PowerShares DB U.S. Dollar Index Bullish Fund). The following link shows a chart of the U.S. Dollar versus the Euro over the last five years:
http://finance.yahoo.com/currency/convert?from=EUR&to=USD&amt=1&t=5y

Buying Low (VTI & VEU)

If none of the above investments interest you, there's always the option of "buying on the dip," or buying shares when their value temporarily falls. The market has been so volatile lately -- falling and rising dramatically from one day to the next -- that this could be a way to make a quick buck. I like to do this for the U.S. stock market as a whole (as I just don't know enough about individual companies), and my preferred investment vehicle is VTI, Vanguard's Total Stock Market Index ETF. It has relatively low fees.

I also recommend VEU, Vanguard's FTSE All-World ex-US ETF. This mirrors the value of most other stock markets in the world. In fact, when the Dow Jones Industrial Average or S&P 500 falls in value I buy shares of both VTI and VEU because this helps protect my investments from the falling value of the U.S. Dollar. (All else being equal, when the U.S. Dollar falls, VEU will rise in relation to VTI.) I bought both these ETFs when the Dow Jones Industrial Average fell below 13,500 and sold them when it got close to 14,000, earning a tidy profit in a matter of days.

The danger of buying low is that you might be "catching a falling knife," or buying stocks while they're falling and still have further to fall. A friend of mine did this after the tech bubble exploded in 2000. He was lucky enough to get out of stocks shortly before the market collapsed, but bought back in too early. As a result, his investments cascaded in value along with everyone else's. (If you find yourself in this predicament, the best strategy is to hold onto the shares, as the stock market invariably rises over the long run.)

The following link features a chart showing the change in the Dow Jones Industrial Average since 1900:
http://stockcharts.com/charts/historical/djia1900.html

NOTE: You invest at your own risk. The author and this website cannot be held responsible for investment losses incurred by readers of this article. (Be careful. You could lose your shirt.)