A time for the cautious investor

You can't do much worse than follow Warren Buffett, the legendary US investor whose status as the second richest man in America speaks for itself. Warren Buffett is presently sat on $42 billion in cash.

That means the world's greatest investor is out of the game. He has not bought US equities for some years, believing them very overvalued. He does not even like the US dollar and diversified into foreign currencies a while ago.

But true to form, Buffett did manage to snap up energy assets before the recent oil price upswing, and seems not to have lost his midas touch. Anyone who followed him in buying PetroChina shares has been richly rewarded.

No, the watchword among investors like Buffett and much humbler mortals is the preservation of capital. It is not that easy. Any holder of a US dollar deposit account has lost 1% of capital over the past week alone in euro terms.

Oil shares remain a popular option, though some would say too popular an option. The danger here is that oil prices have fallen in the past week, and slowing world economies may remove the demand pressure on prices. The oil shares would suffer.

Gold as a safe haven is a clear alternative with prices up 70% since April 2001 when the current rally started. Dr Marc Faber sees a NASDAQ style spike in gold prices over the next couple of years in a re-run of the late 1970s.

Gold also has the advantage of being a hedge against both inflation and deflation, whereas bonds only protect against deflation and get wiped out by inflation and rising interest rates. But there is no income stream from holding gold and there will be a downside to prices as soon as investors regain interest in equities.

Buying euros or Swiss francs is another option. Interest rates are low to non-existent but the capital gain in dollar terms could be strong. However, timing currency market moves is notoriously difficult and even experts shy from making precise predictions.

The advantage of not investing now - either in real estate in places like the UK, or US equities, for example - is that you live to invest another day.

Of course, you might get caught out by a short term rally - but holding equities at a time when the experts are largely out of the market does not look a recipe for success.