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No doubt the last few months have been like Nightmare on Elm Street for main street investors.  Since May 2015, the market is down more than 12% – and the pace of loss in December, January, and now into early February suggests this might be real and sustained.

What’s interesting however, is how people react to tumbling markets.  What do they do with their money in the face of adversity?  I’m suggesting there are three basic reactions which I describe as Dumb Money, Scared Money, and Smart Money.

Dumb Money – is money that is paralyzed.  Its money that remains exposed to market risk despite conversations with investment advisors whose ‘go-to’ answer is “don’t panic – we’re in it for the long haul – markets always come back.”  They say this because they don’t have ‘safe’ options that leave you with any chance of growing your money in a meaningful way; they have no idea where the market is going themselves; and they don’t want to lose your business.  What else would you expect them to say?  It may not be comforting, but the safety of your money may be their secondary concern.

Scared Money – is money workers keep putting into their 401k plans because (smartly) they don’t want to interrupt their savings discipline.  Most don’t really know what their money is going into now, and to the extent they can get information about alternatives, it comes from someone in the HR department who is equally clueless.  They’re as afraid to keep putting money in as they are to stop putting money in – all for lack of information.

Smart Money – is money that uncompromisingly insists on achieving two objectives.  First, smart money must be completely immune from market risk – and second, smart money must still offer a good (or better) return.

It’s not too difficult to find smart money options that meet the first criteria, it’s the second one that is more elusive.  Bank certificates of deposit and money market funds satisfy the safety requirement, but they don’t offer decent returns.  Bonds may seem safe, but in fact, they fail to deliver on either criteria.

More and more savers are discovering that insurance products uniquely fit the bill – particularly indexed life insurance and indexed annuities.  In fact, much of the money that has fled the market in the last several months is finding its way to insurance companies because of their feature set.

Both indexed life insurance and indexed annuities offer complete safety from market risk, which, in itself gives them a huge leg up.  But both also offer attractive growth potential – often double-digit growth in good markets, and mid-single-digit growth in the not-so-good times.

Annuities have the added benefit of guaranteeing lifetime income, something that, with the exception of Social Security, is more and more elusive as private pensions fade away.  Cash value life insurance can be converted into tax-free income, which is even harder to find in today’s climate.

When market volatility is playing on our nerves, it is not the time to be either dumb or scared – it’s time to find smart alternatives.  You may have to turn over a few more rocks, but hasn’t that always been the case for the best investors?