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Alternative investments in a volatile stock market

The nightmare on Wall Street got you gobbling antacids and wishing you'd left your life's savings in a cozy little low-interest, FDIC-insured savings account?

You're not alone. These days, investors great and small are feeling sorely used by the market meltdown.

Throughout the Roaring '90s, the only real risk associated with the stock market was the eyestrain you might experience from reading the fine-print disclaimers at the bottom of a prospectus. Sure, it said you could lose money, but who believed it?

Lately, however, it's as if someone suddenly switched the movie. Instead of "It's a Wonderful Life," we're now quaking in our seats watching Hannibal devour our portfolios with fava beans and a nice Chianti.

Some investors are not waiting for this stock market horror flick to end. They are walking out of the equities theater and exploring other investment features.

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Here's a preview of seven popular alternatives. But remember: Investments aren't for entertainment purposes only, so don't buy any new ticket to riches lightly.

1. The REIT way to invest
Looking for a relatively low-risk investment that generates dividend income and routinely outperforms the S&P 500? Check out real estate investment trusts, or REITs, a way to benefit from property ownership without becoming a landlord.

Most REITs are commercial real estate trusts that sell shares in portfolios of large-scale commercial properties. REITs typically specialize in a particular property type: office buildings, self-storage facilities, shopping malls, health care facilities, hotels, apartment buildings. A small percentage of REITs, known as mortgage REITs, engage in real estate financing, typically residential mortgages.

Jay Hyde, spokesman for the National Association of Real Estate Investment Trusts, says REITs this year are up about 8 percent, which includes share appreciation and a current dividend yield of 7 percent. REITs are required to pay out more than 90 percent of their taxable earnings in the form of dividends.

Earnings aside, Hyde says REITs have one quality investors like: "The fact that it's tangible is something that is easy for investors to relate to. It's something you drive by every day, or live in, or shop in or work in."

You can invest in a REIT directly or though a real estate mutual fund. Hyde suggests REITs make sense as a 5-percent to 10-percent core holding in a portfolio; that's about what pension funds typically put into REITs.

REITs aren't immune to risk. Corporate downsizing and regional downturns can result in high vacancy rates, for instance. But as a low-worry alternative, REITs may provide shelter from the storm.

2. Prepay your mortgage
You've probably been approached in recent months by your mortgage company with an offer to help you step up your mortgage payments and thereby save thousands of dollars in interest over the term of the loan.

Conventional wisdom states that if you stand to realize a greater return after taxes by investing that money elsewhere (say, the stock market), don't prepay. But the ugly collapse of Enron, WorldCom and Global Crossing is making the prepayment option look pretty good about now.

Here's a thought: Take that savings you realized on your monthly mortgage payment by refinancing and prepay it toward your principal. As the British say, that's as safe as houses.

3. BAM! POW! Collect comics!
This may not seem like the best time to let the kid in you take over the investing. On the other hand, that might be just the antidote to pervasive corporate greed.

Comic books are a surprisingly fun commodity that come with their own soundtrack (KA-RAAK!) and increase in value quickly, according to Ken Brown, who owns Downtown Comicbox, an online collector's site.

"The average comic will see an increase in value within a three-month time period," he says. "Books that achieve a seven-day sellout will increase within one to three weeks."

The good news: Almost all comics increase in value over time. Many dime and quarter books now sell for $2,000 to $3,000, with rarities going for as high as six figures.

The bad news: "Investors forget that a book will only achieve its return when you find a buyer that will pay the price that the market is bearing," says Brown. "If you invest large sums of money with no buyers to make your product liquid, the profits may not be achieved in the desired time frame."

Brown says the key to successful comic investing is to research the industry, read trade magazines and sites such as his that offer investor tips, then visit live online auctions like those on eBay before purchasing a high-ticket comic.

"Online auctions are the most accurate indicator of what a book will immediately achieve on the open market," he says.

4. Max out your retirement fund
If you're like many who dabbled in tech stocks and otherwise speculated in the stock market rather than investing for maximum tax advantage in your IRA, 401(k), SIMPLE or SEP retirement account, you have heard the dreaded "I told you so!" from the parents already.

There's still a chance to redeem yourself, especially during the ongoing market volatility, by "maxing out" your annual contribution. IRA contribution limits were increased from $2,000 to $3,000 this year, and you can toss in an extra $500 if you're age 50 or over. Employee 401(k) contribution limits are currently $11,000 and will step up $1,000 per year through 2006. If you have a SIMPLE, you can contribute and your employer can match up to $7,000. SEP holders who earn less than $200,000 a year can contribute up to $40,000.

In addition to the tax advantages of retirement plans, there are other programs such as Medical Savings Accounts and Coverdell education savings that allow you to dip into your account for specific needs.

If your employer offers any sort of matching program and you're not taking maximum advantage of it, you probably should. Sure, many of these accounts are invested in stock funds, but the tax breaks they offer, as well as their generally longer time frames, can help make dealing with market turmoil a bit easier.

5. The grapes of wealth
Lending new dimension to the term "liquid assets," collectable wine can provide a tasty haven from the stock market if you're willing to do your homework, according to David Parker, president and owner of Brentwood Wine Company, one of the largest online wine auction houses.

"As wine reaches maturity, demand goes up while supply diminishes every year, thus driving the price up," he says. "If a wine doesn't go up in the future, you can always 'liquidate' (i.e., drink it). It's a way of getting your money back."

Parker says only 1 percent to 2 percent of all wine made will improve with age, and of those, perhaps only a half percent are truly blue chip investment quality. Wine collectors know the good stuff, which means it will cost anywhere from $80 to $1,000 a bottle on release. Some wines, such as Bordeaux, actually sell as futures years before they're bottled. It can take up to 20 years for some collectable wines to mature.

To come out ahead as a collector, you'll need to follow the Wine Market Journal, the Wall Street Journal of the industry, and have a dependable place to store your investment (most major cities have commercial facilities), as wine quickly shows signs of poor storage

"I would never recommend that people buy wine for investment until they have truly educated themselves on the market," says Parker. "It's like gold. You put 3, 5, 10 percent of your investment fund in wine."

6. The best little ore house
Speaking of gold, there's plenty of evidence that the 20-year bear market in the precious metal may be over and the running of the bull(ions) may be under way.

According to September's Austin Report, gold bullion and coins are up 14.5 percent this year, increasing in per-ounce price from $268.40 on Jan. 2 to $311.80 on Aug. 15. During the same period, the Dow lost 14.2 percent, the S&P 500 was down 33.1 percent and NASDAQ declined 59.8 percent.

Gold investors always point to the last bull run, when gold reached $850 an ounce. Can it do it again? Opinions vary; some even predict it can top $1,000.

Gold has definite advantages: It's portable, private, affordable, in limited supply and offers immediate liquidity and underlying value. Combine these advantages with the stomping of hooves and it may now make sense to sock away a few American Eagles, Aussie Kangaroos or Krugerrands.

7. Give it away!
Barry Katz, a certified fee-only financial planner and owner of Caratel Financial Services in Sunrise, Fla., says sometimes the best move is to put the money to other uses rather than investing it.

"Maybe if the money is not doing much in your conservative portfolio because you're retired, you can gift it to the grandkids who can be more aggressive with it because they are younger and their goals are further off," he says.

Or perhaps it's time to take that cruise you've always dreamed of. An added bonus: Cruise packages are selling at rock-bottom prices, too. "If you're losing sleep over the fact that your portfolio is losing money, maybe it is time to take the cruise," he says.

It's also a good time to consider donating to charity.

"If the issue is the money is doing nothing in my portfolio but going down in value, and I've done my financial planning and know there are sufficient assets there to meet my goals and objectives, in this down market maybe it can be put to better use by giving it away to a child or grandchild, giving it to the Red Cross or taking that cruise," says Katz.

Jay MacDonald is a contributing editor based in Florida.

-- Posted: Sept. 20, 2002

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See Also
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