Wisdom of Rich Dad

After the stock market lost 20% of its value in October 1987, Sam Walton, then one of America’s richest men, was unfazed.

In less than a week, the value of his Wal-Mart Stores stock had dropped almost $3 billion, reducing his wealth to a mere $4.8 billion. “It’s paper anyway,” he told the Associated Press. “It was paper when we started and it’s paper afterward.”

Given the wrenching swings of the past two weeks, many of us may wish we could be so sanguine about our own losses. But even without a few extra billion dollars in the bank, there are useful lessons to be gleaned from the way the Waltons and other ultrarich families cope with investments and market volatility.

Just like us, the rich want to maintain their lifestyle, preserve wealth and have money for their heirs or philanthropy. And when it comes to investing, there are several ways the rest of us should take a cue from them:

• The very wealthy have a plan. Sam Walton’s plan started in the early 1950s, when, on the advice of his father-in-law, he set up a family partnership, made up of him, his wife, Helen, and their four children, to own his two variety stores. By doing that, he began planning his estate and building family wealth years before he opened the first Wal-Mart in 1962.

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How much better will you do if you invest well instead of poorly (or earn the average)? — James McGrath, San Marcos, Calif.

Considering all the attention investment pros (and financial magazines) lavish on picking the right stocks and funds, I can understand why you might think superior investing ranks above all else when it comes to a `secure future and a comfortable retirement.

Savvy investing is certainly important — you don’t want to blow your savings on lousy funds or ineffectual strategies. And you’ll end up richer if you happen upon a winning investment. If you’d owned the Sequoia Fund for the past decade, for example, a $10,000 balance would have grown to more than $16,000 now, vs. $12,800 if you’d simply earned the market return.

But as a practical matter you can’t know in advance which fund or stock will beat the market — in fact, over the past 15 years, only 55% of U.S. equity funds did so, according to Morningstar. Rather than pinning your hopes on higher returns, I’d say boosting your savings rate is a surer way to improve your retirement prospects.

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The familiar question often investors face is: Stocks or bonds? The answer, unsurprisingly, is often wrong. Guess why? Because it was the wrong question to ask in the first place.

The stock market has always been risky way and is more so today, as the world braces for an impending recession. In times like these, even bonds carry a high risk. But all is not lost. All you need to do is think outside the box.

To avoid the perils of a tumultuous market, and to still keep your money safe, here are some alternative investments.

Classic Car

Are you a car enthusiast? If so, it may be time to put more money into this “hobby.” When you invest in “classic” cars you are getting the best of both worlds. Not only is this a lot of fun, but you are putting your money into an investment that is safer than the stock market.

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I grew up next to a forest. I remember, as a child, hiking through the trees with our two golden retrievers in tow and, hilariously, panning for gold in the stream. I started with high hopes. I saw plenty of gold — all fool’s, alas.

Investors, too, have been hunting for riches in the forests — and these days, they’re also seeking shelter there. Market guru Jeremy Grantham, whose investment firm, GMO, has historically been bearish about stocks, keeps a large chunk of his personal portfolio in timber — seeing it as a valuable defensive investment in a tumultuous market like this one. For similar reasons, Harvard University has invested in timberland for many years. And Boston financial-services giant John Hancock owns 5.3 million acres of timberland around the world on behalf of institutions and rich clients.

There are good reasons for all this interest. The correlation between timber and other assets is low, which means timber is not very likely to lose value when, say, stocks are tumbling. Over the past two decades, the benchmark timber index, tracked by the National Council of Real Estate Investment Fiduciaries, has produced a tenfold return.

And it’s a steady performer in tough economic times. As Grantham once wrote, timberland “has had a history of rising in all great equity bear markets.” He adds that it’s “very safe: If the sun shines and it rains, the trees grow about on schedule.”

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In response to the market’s recent swings, a growing number of investors—from hedge fund managers to retail investors—are making bets on what looks like the only sure thing: market volatility itself. They are making these bets via 28 new exchange-traded funds or notes that track the Chicago Board Options Exchange Market Volatility Index, more commonly known as the VIX. The oldest was launched in 2009. From January to August, assets in the group grew 32% to $2.8 billion.

The short-term returns for some of these products look pretty fantastic. The biggest of the bunch, the iPath S&P VIX Short-Term Futures ETN, gained 47% in the month ended Sept. 9, according to fund-tracker Morningstar, Inc. The most straightforward VIX-linked investments—those that don’t offer amplified or inverse returns—gained 38% on average in the same period.

Often called “the fear index,” the VIX measures how rocky investors expect the market to be, based on the prices of options contracts. (The more stock prices are expected to swing, in either direction, the more expensive options contracts become.)

But the dazzling performance may blind some investors to the nuances of these investments. The VIX has no intrinsic value. The futures contracts it holds only rise in value when investors think fluctuations will be more extreme tomorrow than they are today. Investors’ fears and speculation are themselves a volatile asset, notes Timothy Strauts, an ETF analyst with Morningstar, and the VIX “just oscillates from fear to calm and back.”

Because of how the funds are designed, it is also difficult to make long-term gains betting on fears of volatility. Consider that the VIX was recently at 43, up from 27 a year ago. Yet over the same period, an investor who bought and held the iPath ETN would have lost 55%. That is because if volatility rises or even stays flat, the underlying options contracts get more expensive. To keep up, the ETFs are constantly selling cheap contracts in favor of more expensive ones, and investors who hold the funds for more than a few days notch those losses.

These products are designed for short-term traders, says Tim Edwards, a vice president at Barclays Capital. If an investor expected volatility to spike, say, after the Federal Reserve meets on Sept. 20, he would typically buy a VIX-linked fund a few days before, and hold it for less than a week. Essentially, making a profit through a VIX-linked product requires perfect market timing—a skill that history shows is in short supply.

Spot platinum headed for a seventh consecutive session of gains on Wednesday, after buying interest was triggered last week when its value relative to gold dipped to a discount for the first time since the 2008 financial crisis.

The spread between spot platinum and gold prices hit a discount of $31 (U.S.) an ounce last week, its lowest in nearly 26 years, as economic concerns boosted the safe-haven appeal of gold but weighed on industrial metal platinum.

It quickly returned to a premium of $32, still well below an average of $205.80 since 1985, but the dark clouds over the global economy may still dim platinum’s longer-term outlook.

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