Investing: Protect your money from stupidity

• Best cures for short-term swings: Cash, precious metals
• You can add insurance positions to your portfolio to hedge
• The debt ceiling, Europe and the fiscal cliff all loom

You're all set to visit your relatives in Indiana when the guy operating the earthmover in front of your house starts texting his girlfriend. When he ruptures a gas main, your trip to Fort Wayne is suddenly rerouted to Alpha Centauri.

Stupidity has played a large role in human events, from the Aaron Burr-Alexander Hamilton duel to the Facebook IPO. In fact, the biggest worry investors have today is stupidity: The debt ceiling, the fiscal cliff and Europe, to name three. Otherwise, the outlook for stocks is good: Shares are reasonably priced, relative to earnings;interest rates are low; tax rates are low; corporate coffers are fat.

But how do you protect your portfolio from the foibles of the world at large? You have several options, but you should look at them as insurance, not investments: Your world would be a lot better if you didn't collect any money from them.

Let's start with a roundup of various potentially painful stupidities:

* The fiscal cliff. If Congress fails to act by Dec. 31, the nation will face $600 billion in combined tax increases and budget cuts. The Dec. 31 deadline is a double-barreled shot of legislative silliness.

The first barrel: The Bush tax cuts, as passed, were scheduled to expire at the end of 2010, but Congress extended them for two more years. If nothing happens, the maximum federal income tax rate will rise to 39.6% from 35% now. In addition, the current 2 percentage-point reduction of the Social Security payroll tax would lapse, and the Alternative Minimum Tax thresholds would roll back to 2000 levels.

The Tax Policy Center estimates that the fiscal cliff would hit 90% of U.S. taxpayers, and cost an average $3,500 in extra taxes per household.

The second barrel: In order to raise the debt limit -- more on this later -- Congress agreed to create a supercommittee that would would create laws to reduce the deficit by $1.2 trillion over 10 years. Not surprisingly, the committee wasn't terribly super, and couldn't agree. As a consequence, a second part of the agreement would slash the budget across the board.

So: If Congress doesn't resolve the fiscal cliff by Dec. 31, the nation will face tax increases and budget cuts that could cost the average family $3,500 and affect about 90% of all households.

* The debt limit. Remember when the government deadlocked on raising the debt limit last year? The stock market plunged, and Standard & Poor's downgraded the nation's credit ratings. Good times.

Congress will have to face the debt limit again early next year, and similar fun-loving hijinx will probably ensue. Just to be clear: The debt limit isn't a limit on how much money Congress can borrow. It's a limit on how much the government can use to pay obligations it has already incurred. People who think that it really doesn't matter if the nation pays its bills are the same kind of people who get eaten by bears.

* Europe. The fiscal cliff and the debt ceiling are, at least, woes of our own devising. But there's very little that you can do about Spain, Greece and Italy. Should Greece default on its debt to spite the rest of Europe, or the rest of Europe impose crushing measures on Greece, Italy and Spain, world stock markets will, no doubt, react badly.

What's an investor to do? You can, if you like, add relatively small insurance positions to your portfolio to hedge away possible stupid-related tumbles. For example:

* Gold or silver. Investors instinctively rush to hard assets, such as gold, when paper currency loses value -- typically, because of inflation. But hard assets also appreciate when the world seems to be going to flinders.

If you decide to add gold -- or silver, which is less expensive -- consider bullion coins.They're easy to buy and their purity is generally unquestioned. You may also consider a commodities fund that invests in precious metals.

* VIX funds. The average person shouldn't use funds that track the CBOE volatility index, or VIX, because it's mainly a trading vehicle. ProShares VIX Mid-Term Futures ETF is one fund whose share price should rise if volatility rears its ugly head. It's not a fund for the faint-hearted: Volatility has fallen this year, and so has the fund.

* Cash. It's as boring as a bread sandwich, and has almost no return whatsoever: The average money market fund yields just 0.03%. On the other hand, you won't lose money, either, which is the point.

Is it worthwhile to hedge your bets? For most people, monitoring a market hedge is just too much work. If you're really terrified, move a bit more money to cash.

On the other hand, people have been doing stupid things since Hammurabi stepped on the first rake. Just as the first debt ceiling crisis passed, the second will, too. Probably the least stupid thing to do is to keep your eyes fixed on your long-term goals and let the short-term silliness sort itself out.