Rethinking portfolio strategy for 2005

You would have bought gold, GCC stocks and Dubai property, and have sold UK housing and US equities and shifted away from holding the US dollar. OK so you might still own a few oil stocks, nobody is 100% right. Now well in advance of the New Year portfolio review, this is as good a time as any to examine strategy for 2005.

Fortune, in investing, does not favour the bold. They tend to do something stupid after some time.

It favours the cautious long-term investor who picks the right asset classes and sticks with them on the up and sells before the downturn. Selling too early is how John D. Rockerfeller said he made his fortune, and it was one of the biggest the world has ever seen.

Thus rushing back into US equities is a short-term strategy that might gain traders a modest upside but this has to be balanced against the very bearish outlook for US equities in 2005. Interest rates are on the way up, corporate profits have peaked and the fall of the dollar is not good for equity values either, especially if foreign investors panic and bail out.

Property - residential and commercial - is also to be avoided like the plague in the UK and US markets. Commercial property is on a slightly later cycle than residential property, but both are past the peak of the cycle and on the way down.

Just ask the Governor of the Bank of England if you have any doubts about this, although the many critics of this column's negative remarks over the past year might like to consider their own record on forecasting house prices in 2004.

Property is really for losers in 2005. US interest rates look sure to rise further, and again the property cycle is working against investors and not with them.

Ditto the outlook for bonds which can hardly be healthy if interest rates continue to rise; and if bonds di actually rise that will be a signal that the economy is in such a mess that the Federal Reserve has to go for an emergency rate cut which is hardly a positive indicator.

In a recession cash is king! I am not sure who said this first but they are right, although be careful which currency you keep your cash in.

A depreciating currency is just as bad as holding assets whose value if falling. So lesson one for the 2005 portfolio: keep away from the US dollar and keep cash in euros or Swiss francs, or the Singaporean dollar according to Dr Marc Faber.

Your second portfolio must is gold and gold mining companies. You can hold the physical assets through the new GLD depository receipts - a timely innovation from the New York Stock Exchange - or buy shares in big gold firms like Newmont, Harmony, Gold Fields and Placer Dome.

Gold is a hedge against financial instability. For that is surely where global capital markets are heading in 2005. The year after a US presidential election is usually a bad one for financial markets and with the twin US deficits and the dollar tumbling, there is no reason to think 2005 will be the exception to this rule.

The yellow metal is two years into a bull run, and pundits expect another 18 months to two years in this particular commodity cycle. It would certainly be unusual for the cycle to be shorter than that, and as investors bail out of US dollar assets they do not have many other places to go except to invest in gold which has a limited downside and the potential for a substantial upside.

This is pretty sobering advice, but then 2005 looks like being a very sober year. Even GCC stocks may come off their recent highs due to more moderate oil prices, and booming regional real estate markets would not escape the effects of lower liquidity either.

For remember: buy low, sell high and keep your assets liquid in bad times! By the way, hang on to your oil shares, this bull market may not be over just yet.