Even yoda might have trouble figuring out the current market environment. In a world of falling prices, how can wealth be protected? I have some news for you. Even in a falling market, wealth can be not just preserved; it can be created. With just a few simple techniques, Ill show you how to supersize your portfolio.

Shorting stock. The phrase sends a blood-curdling chill down many a buy-and-hold investors spine, frightening them into a shock-induced state of confusion. Yet for masters of this easier-then-it-sounds technique, its an extremely profitable oasis within the uncompromising desert that is this bear. Confused? Its like this… the vast majority of investors only buy stocks. When you buy a stock, there are two ways to make money. Stock price appreciation (buy low, sell high), and dividends. Which is all well and good when the market is going up, but for markets such as the one were currently embroiled in, we need a whole different animal.

While counter-intuitive, shorting stock is less complicated then you might think. The goal when shorting stock is the same as when buying; your trying to buy low, and sell high. The only difference is that you do it in the other order. You sell stock today, and you buy it tomorrow (or some other time in the future), hopefully for less. By doing so, you make a profit equal to the difference between your buying and selling prices.

An example… In early October, Kellogg (K) was trading for around $56.00 per share. Over the next two months, it dropped from just over $55.00, to $42.00 per share. Shorting 100 shares of Kellogg would have, in this instance, had a profit of $1400. The procedure would be the following. When you short the stock at $56.00, you borrow 100 shares from your broker, and sell them on the open market, giving you $5600. Later on, you decide to buy back those shares, and return them to your broker, while Kellogg is at $42.00. This costs you $4200. Now you have covered your short position, for a profit of $1400. Not to shabby for 2 months, and a $5600 investment.

A more abstract, but ultimately easier way to think of shorting is a way of owning a negative number of shares. If when you own 10 shares, and a stock goes down by $100 , you lose $1000. If you own negative 10 shares, and a stock goes down by $100, you gain $1000. Simple as that. Naturally, an increase in price works the same way ” a price increase means owning a negative number of shares leads to a loss, but in a bear market, thats a rare thing.

Even still, shorting stocks has risks. If you choose the one stock of 100 that is about to start trending upwards, you could lose some money on that. Different sectors of the economy may also be effected by events that cause exceptions to the everything goes down in bear markets rule. The recent auto bailout could feasibly cause industrials to go up for a while, so shorting industrials could choose to be a bad choice. The biggest risk is that the bear market turns into a bull market while your not paying attention ” that could rack up losses on many positions at once.

One standard practice among investment professionals is the 5% rule. This rule is used when deciding how many shares of a company to buy/short, and is an invaluable tool when shorting stocks. Lets say you want to short a $15 stock, but your not sure how many shares to short. First take the amount of money in your portfolio, say, $10000. Then, take 5% of that. $500. That is the amount you can risk on this transaction. Next determine the most logical stop loss. Lets say you decide if the stock goes above $17.50, youll sell your shares using a stop loss. If you can lose 2.50 per share, and your willing to risk $500, then you would short 200 shares of the stock, maximum. Many risk adverse investors choose only 2 or 3%, but 5% serves as a good maximum for even most risk-tolerant investors.

The current trend in the market is down. This is the most important thing to keep in mind when deciding where youll invest your money at this point in time. When the stock market is in bear market mode, almost all stocks are moving downwards. When this happens, it doesnt make sense to buy-and-hold like the masses. A far more productive approach is to find out whats working and to use that method instead. In the context of a bear market, the easiest way to make money is to short stocks or etf’s.