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We recently took our young kids to Colorado for a family vacation.  As we now live in the flattest of flat-lands, the notion of mountains was something that we found hard to articulate to the kids in advance of the trip.  How many different ways can you say “tall” to a five-year-old?  We were, however, confident that they would quickly grasp the magnitude of the mountains upon viewing them first-hand.

As luck would have it, the drive from the Denver airport to the Rockies was full of excitement for the adults, but something less than thrilling for the kids.  Dark, tall shapes loomed ahead.  Did anyone care?  Not so much.  Are those clouds?

In fact, it took several days in the actual mountains before the little ones noticed that their perspective, and their altitude, had changed.  Unfortunately, they never quite fully grasped the concept that a 10,000 foot drop-off was more significant than a step off of a curb.  Getting close to the edge occasionally made them aware of it, but awareness didn’t necessarily translate to good decisions – or calm stomachs on the part of the parents.

It’s likely that August 4^th, 2011 is something like the edge of a cliff (though let’s hope that the bottom isn’t 10,000 feet below).  Now that we’ve all seen it, the real question is what kind of investment behavior will this brush with the edge have on investors?

The inside money is likely on everyone’s most recent topic: gold.  All-time highs and incessant media exposure – what’s not to like?  In the last seven days of bloodshed it must be the run-away winner.  With that in mind, let’s take a look at some ETFs that represent some of the major asset categories, including domestic stock, international stock, emerging markets stock, oil, commodities, real estate, gold, inflation protected bonds and the overall domestic bond market.

Source Morningstar® Data as of 08-04-11 08:02 PM CST| USD l Cobb Retirement Solutions, LLC has not audited this information and can not warrant its accuracy.  Please review the underlying prospectus for each investment for any additional information.

Over the past week gold has no doubt trounced the free-falling stock market -- any stock market.  In fact, gold at an all time high over the past week also beat the returns of the stodgy old domestic bond market over that same period by upwards of roughly .50%. 

Hold on.  Did I say domestic bond market?  Weren’t we all warned that the end was near for bonds?  Isn’t that the same category that was entering free-fall with the certainty of double-digit losses at the beginning of 2011?

It gets more interesting.  Inflation-protected securities (TIPS), which are issued and backed by the increasingly feeble U.S. government, trailed the hottest-of-hot gold market by all of .10% over this same period.  Wait a minute.  How could the return of gold, which is increasingly fed by the belief that the U.S. (government, economy, stock market and currency) is in rapid decline, ever mimic the return of bonds directly tied to all of those same ailing elements.  Since TIPS in particular, by design, increase in value with increases in inflation, why would what many see at the entrance to a new recession trigger gains in TIPS?

I have no idea how the market is going to close today, or next week.  I suspect that increasing the proximity to those dates will lend little if any wisdom to investors (who may well be standing on a ledge overlooking a drop-off they can’t fathom).  Unlike mountains, which we learn to appreciate through experience (or don’t survive the experience), I think most of us as investors are like the folks who stare at stereograms with wide, unblinking eyes hoping to see the concealed picture within the picture.  Sometimes you do, sometimes you don’t.  Even after someone reveals the identity of the hidden image it’s still hard for some to grasp it (I will admit to membership in this final category).

I don’t know which area of the markets will be the hottest for the next day, week or year.  If I did with any certainty there’s a high likelihood that the last thing I’d ever do is tell someone else for fear of upsetting my carefully constructed bet.  The markets, like stereograms, often make a lot more sense in hindsight, but there are plenty of times when even that benefit is no help.  I hope all of us gain the wisdom to stay away from the chasms without having to experience the corresponding fall.

Disclosure: Cobb Retirement Solutions, LLC does not sell securities.  The information presented here is for informational purposes only and is not in any way a recommendation to buy or sell a particular security.  Past performance is not indicative of future performance.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients.  Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.