Recently, I've been talking about the grave risks of relying too heavily on sterling assets for your savings. The brutal fact is that things are going to get a whole lot dearer for us poor souls in the West as our currencies weaken against the emerging colossus of the East.
And it drew an interesting comment from one Right Side reader. "Mine, as well as many others' pension funds being linked to final salary, will not be worth as much as popularly believed should I switch it to gold?!!!"
Today, you could do exactly that by shifting your pension into a Self Invested Personal Pension (SIPP) and buying a gold ETF. Then, in one simple move you'll be holding the ultimate international currency.
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But would I do that? No chance.
I certainly like the idea of taking control of retirement savings and managing them more proactively. But the suggestion flags up two fundamental problems.
Firstly, there's the whole issue about holding a diversified portfolio. And then secondly making drastic changes to your portfolio. Those are two very important issues that I'd like to look at today.
Diversification really packs a punch
The first probem with swapping your sterling assets for gold is that it is hugely risky. Punting all your savings into one type of asset misses the massive benefit of diversification.
The obvious thing about diversification is that it offers a kind of insurance policy. Punt it all on gold and you may do incredibly well. But then again, you could lose your shirt.
But to me, the key thing about a diversified portfolio is that it gives you the opportunity to switch between assets as Mr Market plays his dastardly game. The market will move one way and then, just when you think you're winning it'll go the other way, leaving you flat on the floor.
And during Mr Market's meanderings, he'll offer opportunities - and only a balanced portfolio will allow you to profit from them. It's certainly worked in my favour over the last few years.
Keep an allocation even if it feels wrong
Around five years ago I wasn't keen on government bonds. They looked pretty poor value. Given the risks involved, debt from an overstretched government wasn't paying what I thought it ought to.
But I stuck with an underweight 4% allocation. That is, I didn't like them, but I held a small position even though it felt wrong.
Then the credit crunch came along. As most of my portfolio followed the markets down, the government debt did exceedingly well.
Come 2009, though I hadn't bought any more of what I considered lousy government debt, my holding as a proportion of the portfolio hit nearly 8%. That position gave me the ammunition I needed to attack an undervalued sector. Namely corporate bonds.
Corporate debt had taken a pounding during the crunch and was offering some rare opportunities. Month by month I reduced government bonds in favour of corporate debt.
That's how diversification really pays. It gives you the ammo you need as the market offers opportunities. Slowly and surely you shift money from your fully valued' assets into cheaper ones.
It's quite conceivable that you hold things in your portfolio that feel wrong. But because none of us knows Mr Market's moves, you need an allocation anyway.
If you punt it all on gold today, then what are you going to sell when Mr Market offers gold at a good price?
Bide your time and the opportunities will show up
Today the markets seem to be in a kind of twilight zone. You don't need me to tell you that central bank initiatives have changed the rules of engagement on the investment battlefield.
And while I'll admit that the two-year bull in equity markets took me by surprise, my balanced approach meant that I held stocks even when my emotions told me to dump the lot' back in 2008.
Since the start of this year markets seem to be trading side-ways. The FTSE, commodities and bonds have all lost momentum.
But here's the thing: at the moment, I can't see any demonstrative signs telling me to shift my money from one asset class to another. And that worries me. In short, opportunities seem thin on the ground.
And it's got me wondering. Are most asset classes now fully valued? Is this lack-lustre market of scant opportunities trying to tell me something?
I mentioned my predicament to Simon Caufield. He's one of the best investors I know at judging tricky markets.
And he's getting twitchy too. Here's the thrust of his argument:
On the face of it, things look pretty reasonable for stocks. By his reckoning, they don't look too expensive. But he's worried that today's record profit margins will come under pressure. Rising input costs coupled with a slow economy will start to erode profits over the next couple of years.
Next year the US election will focus attention on the massive budget deficit. Both government and banks will be coming to the markets looking to roll over trillions of dollars of debt. And if China, the banks and the Fed don't come back to the debt market feeding trough, interest rates will soar.
That's going to be very bad news for stocks, property and bonds. And if the markets grind downwards, then commodities will find it tough too.
By the end of our conversation, it confirmed my fears. It's probably time to start moving into a reviled asset class. And that is cash.
It's the ugly assets that will see you through
Right now it feels like a terrible move. We all know that cash doesn't pay its way.
But experience tells me that it's the assets I least like that will provide the ammunition for future opportunities.
There's no moratorium on buying other investments and I'm happy to let you know new opportunities as I see them. But for me, there's more money coming out of the market than is going in.
Slowly but surely (and though it doesn't feel great) the cash side of my portfolio is starting to grow.
If you are concerned about your portfolio and retirement savings, then there's more help at hand. At 4pm today you'll be receiving a rare opportunity to take a look at how Simon is proactively managing his funds in these tough markets.
Listen to what he's got to say. I'm sure he'll have you glued to your monitor.
This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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