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Some Cautious Investors Following a Golden Rule

November 07, 1987|DEBRA WHITEFIELD

QUESTION: I didn't have much money in the stock market when it crashed. But a lot of my neighbors and friends at work did, and they're yanking out their money and putting it in gold and silver. I feel stupid saying this, but I don't understand why. Can you explain?--W. O.

ANSWER: Throughout history, whenever the value of securities or paper money--such as the U.S. dollar--declines, worried investors have poured their money into something tangible. Gold and other precious metals are the most common tangibles. Art, antiques and jewelry are other examples.

The feeling is that these are things of real value--unlike paper securities or paper money--and that, in the long run, they will always appreciate in value.

As a hedge against bad times, the clear choice over the years has been gold. It was once the standard for our currency, and it is easy to buy. Storage, however, is another matter. In small quantities, it is easy to store in a safe deposit box. But investors who buy bars weighing up to 400 ounces may find storage difficult.

Gold is available in coins--such as the American Gold Eagle--or in ingots, wafers or bars. Some investors also put their faith in gold by buying the stocks of gold mining companies. The beauty of gold stocks is that they tend to rise in value at a faster pace than actual gold does. But the drawback is that they also decline faster.

Investors buying gold coins as a replacement for stocks should also remember that it is the metal you are after--not the numismatic value of the gold coin. You will have to pay a small premium above the value of the gold in the coin. But steer clear of dealers demanding high premiums for the "collector's value."

Also steer clear of high-pressure salesmen offering to sell you certificates backed by huge quantities of gold for a fraction of the metal's value. Thousands of investors have been burned over the years by such tactics when they later learn that they are subject to margin calls if the metal's value goes down or that there was never enough gold in the seller's vault to cover the certificates issued.

Q: Do you know whether it is still possible to write off the cost of installing an alarm system in your home? Or did tax reform eliminate that deduction?--H. D.

A: Unless you operate a business out of your home, you never could deduct the expenses of installing a home security system--and you still can't.

If you do run a business out of an office at home, the tax laws permit you to deduct the costs of installing and maintaining an alarm system--but for the office only. In other words, if you install a security system covering both your office and the rest of your dwelling, you may deduct only that portion of the expenses that covers your office.

Say the office takes up a fourth of the square footage in your house. You could deduct a fourth of the installation and maintenance costs. The number of rooms may be substituted for square footage if you get a higher percentage that way.

All costs are deductible if you install a security system that only covers the office.

Q: Do you have any idea what a DRIP is? I've heard the term used by people talking about the stock market.--I. P.

A: DRIP is short for dividend reinvestment plan.

Such plans take the dividends earned on stock and automatically reinvest them in more stock.

DRIPs have become popular in recent years for two reasons. They are a type of forced savings plan: The investor never sees the money before it is reinvested. And many companies give investors a 5% discount whenever their stock is purchased with dividends.

Whether the popularity will continue in the aftermath of the Oct. 19 stock market collapse is anyone's guess.

Lists of companies offering reinvestment plans are available from two companies: Standard & Poor's and Evergreen Enterprises. But both are quite expensive, so you may want to check your public library for a copy. Ask for either publisher's directory of companies offering reinvestment plans.

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