Three core investments that you should hold now

When you're watching the markets every day, it's easy to get drawn in by the drama.

Having been away on holiday for a couple of weeks, I see that during that time, stocks have slumped and spiked, while gold has spiked and slumped.

Flicking through the hundreds of emailed newsflashes in my inbox, I see plenty of headlines about gold bubbles popping, and others yelping about hundred-point moves in the Dow Jones.

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Yet now both are back to roughly where they were two weeks ago.

Which shouldn't really come as a huge surprise, given that very little has actually changed.

The big picture: the West is broke

Short-term trading can be enjoyable, and for some people, profitable too. And watching the market react to the daily flow of new information and trying to make head or tail of it all is fascinating, even addictive.

But if you don't work in financial markets and you're not a day trader, then stressing about daily movements in markets is a waste of time. If you just want to build a decent pot for your retirement, then fretting about your asset allocation on a daily basis is not how to go about it.

You'll lose sleep. And you'll lose money. As my colleague Dominic Frisby pointed out in a recent Money Morning on gold: "The more trades you make, the more mistakes you're likely to make". What you really need to do is have a long-term strategy that you're happy with for most of your money, and then if you really can't resist dabbling, you can keep a separate pot for speculating.

So what's the big picture for investors just now? In the US, the Federal Reserve is still sitting ready to print more money or do whatever it thinks it will take to save the US economy. What it should really do is to step back and stop interfering. But that's not what it's there for.

Fed chief Ben Bernanke might not have promised more quantitative easing at the Jackson Hole meeting. But the latest Fed minutes showed that he's not going to turn into Paul Volcker any time soon either. One way or another, if the US economy continues to slump, the Fed will be ready with more 'stimulus'.

As for the eurozone, the only feasible option for getting out of its current hole is to issue Eurobonds (jointly-backed government IOUs that the most-indebted countries can use to slash their cost of borrowing). James Ferguson explains more in the latest issue of MoneyWeek magazine, out tomorrow. (If you're not already a subscriber, subscribe to MoneyWeek magazine.) But that will take a while to put together, and in the meantime, markets will remain volatile.

Worse still, it's not a long-term solution. As my colleague Merryn Somerset Webb points out, the real problem for the West as a whole is that "there will never be enough growth to pay back the sovereign debt on the table". That means "the end game of the current macroeconomic situation has to be more money printing and currency debasement".

That goes for the Fed, the European Central Bank, and probably our own Bank of England too. This end game will play out over a long period of time. And it's nowhere near done yet.

What does this mean for you?

So what should you be doing as an investor? The same things we've been saying for a while now. Hang on to gold. It will have its ups and downs, but the bull market isn't over yet, as Merryn has been noting in her blog this week: The real reason you need gold it's insurance.

For stocks, stick with blue-chip defensives that pay solid dividend yields. This will take some of the sting out of inflation, and they shouldn't be punished as severely as other stocks in the event of a crash. And if you hold a diverse enough portfolio, individual disasters (such as BP for example) shouldn't derail your overall returns.

Have a decent amount of cash. It pays to be flexible at times like these, when few asset classes look especially cheap, and nasty surprises lurk around every corner. Yes, inflation may take a bite out of it, particularly if you are holding larger sums. But it's worth enduring a reasonably predictable real (inflation-adjusted) loss in exchange for the options cash gives you.

There are of course, plenty of other assets that you might want to add to your portfolio, from individual stocks to specific investment trusts to 'hard' currency government bonds. A couple of weeks ago, for example, our roundtable experts offered their views on how best to profit from the ongoing shift in wealth towards the East: 14 stocks to buy as East overtakes West.

But if you take gold, blue chips and cash as your core holdings for the current climate, and try not to be too distracted by all the day-to-day noise, I reckon you won't go far wrong. A time will come when other assets look more promising. But it won't happen overnight.

Our recommended article for today

Africa: The next big centre of growth

The transfer of wealth from the West to the East has been ongoing for decades. But now there's a new destination: Africa. It is attracting large amounts of investors' money and many of its economies are growing faster than those in Asia, says Matthew Lynn.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .