Flight to Safety: What to Do With Your (Remaining) Money After Stock Market Delivers a Drubbing

Investors have short memories.

Keeping that in mind, you might want to print this column and save it at the ready. It is timely reading this week and without any doubt will be again — sooner than any of us want to admit.

Along with death and taxes, one certainty in life is that the stock market will gyrate wildly, each time robbing investors of any remaining sense of financial well being.

When a stock market quake hits, stunned shareholders always get airborne, seeking a flight path to safety. In the immediate aftermath, my in-box overflows with queries from shell-shocked individuals searching for quality alternatives to the Wall Street temblors.

My answers are pretty much the same each and every time, although I must admit I remain puzzled why so many people who cry “foul” when Wall Street shakes, soon behave like “fowl” and — despite their badly damaged nest eggs — wing their way back to their 401(k)s and other Wall Street roosts, often within weeks or months.

So, fully aware that I will likely be pressed into writing some variation of this column again in the not-too-distant future, I present three of the questions I’m asked most frequently and my replies:

1. Is Now the Right Time to Shift into Gold?

No. Even with gold topping $1,700 an ounce this week, hell remains icicle free.

It would have to freeze over before I’d tell anyone I care about to look to gold as a suitable investment for any substantial portion of their money.

I’m aware that gold is trading at all-time high levels and I’m also aware that anyone who bought gold at its recent low in 2007 and held on to it has enjoyed a most-impressive gain.

What I’m not aware of are any flesh-and-blood individual investors who timed their gold purchases to actually achieve such theoretical returns. I’m sure there are some such lucky souls out there —they are, however, far more rare than the precious metal itself.

For those of us who don’t enjoy a Midas-touch when it comes to pitch-perfect investment timing, gold remains a leaden financial vessel.

Remember, since gold pays no dividends and generates no income, your only way to profit from a gold investment is to actually sell it for a higher price. (Until you do sell, your paper profits do you no real good – since prices can quickly reverse, as they have many times over the past three decades.)

When measuring gold’s performance versus other (better) opportunities, you have to also account for inflation and taxes.

Gold hit a high in 1980, then plunged and did not return to that level again until 2006 — a full 26 years later! However, on an inflation-adjusted basis, gold would have to be over $2,500 an ounce today to have the same purchasing power it did 31 years ago.

In spite of gold’s recent meteoric rise, that’s still $800 an ounce more than where it is now.

Imagine if you bought gold at the beginning of your career in 1980 and now, nearing retirement, were planning to cash it in to live the good life. Can you spell b-u-m-m-e-r?

And what about taxes? Most people don’t realize that you will pay one of the highest federal tax rates on any profits you might make with gold — whether gold coins or bars or an exchange-traded fund that invests in gold.

That’s because gold (like silver and other precious metals) is considered to be a “collectible,” which is taxed at nearly double the rate of stocks and real estate capital gains.

Gold provides zero certainty, especially for individual investors hoping to shield their retirement funds from volatility and risk. Chasing rising gold prices during this current bubble, history has proven, would be a fool’s errand.

2. Many Corporations and Money Managers are Fleeing to Cash.  Should I Do Likewise?

Cash is a place I recommend to park your stock market refugee funds while you regroup and plot a better, long-term wealth-generating strategy.

U.S. government bonds and FDIC-insured deposit accounts remain safe, fluid vehicles, despite last Friday’s downgrade of our AAA rating and all the recent brouhaha over the debt ceiling.

I’m not sure what Standard & Poor’s was thinking, but I’ll still place my bet on America over the agency’s other AA+ rated countries, New Zealand and Belgium.

(The Isle of Man still enjoys S&P’s AAA rating, but not Uncle Sam? Come on!)

I make no secret that I believe a strategically structured savings plan, built around a specially designed dividend-paying whole life insurance policy, is the single best long-term approach to building wealth securely and predictably. Such plans come without the risk and volatility that you must accept on Wall Street and with precious metals.

But the kind of policies I recommend and the due diligence that professional whole life agents must undertake to make sure you’re getting the benefits of all the available wealth-building and tax-related advantages, can’t be choreographed overnight.

So in the meanwhile, I think extracting your money from stocks and other risky investments and depositing the funds somewhere safe and accessible — in the good old U.S.A. — is quite savvy.

Think of it as your very own “Cash for Clunkers” exchange.

3. Why Not Just Stay in the Stock Market and Ride Out This Turbulence?

As comedian and two-time Grammy Award nominee Ron White would say…

You Can’t Fix Stupid.”

Sorry to be so blunt.

But if you got pummeled in the stock market crash of 2000; lost another 40% or so in 2008; lost more than 10% yet again over the past several weeks; have essentially spent most of the last decade watching your portfolio bounce up and down and with it your peace of mind, only to wind up — for all your angst — pretty much where you started (or worse); and you remain convinced that in order to recoup your losses and justify your past mistakes you have to remain in the stock market until prices (hopefully) rise again… well, I’m certain that the gods must have blessed you with other laudable attributes, but investing intelligence isn’t one of them.

If you value your sanity and your wallet, get away from Wall Street once and forever.