Time to buy? Or time to sell?

The prudent action in such a situation is to sell-up and bank your assets as cash. Now the alternative is to sit tight and ride out the storm, or if the pundits are wrong, then you will be there for the next phase of the upturn.

The latter argument is not a good one. The downside risk presently significantly outweighs any upside as most people agree that market valuations already look stretched.

Likewise, the Ostrich-option of sticking your head in the sand is foolhardy. OK with patience you may well see your assets recover their value in time. But how much more could you have made by cashing out at the top, and buying again at the bottom?

The only case for not selling up is if you really think 2005 is going to be a great year for investors. Let us re-cap why that is not likely to be the case.

First, interest rates are rising which tends to depress the value of property, shares and bonds simultaneously. Basically cash becomes a new competitor for these instruments as a store of value. Moreover, a strong case for overvaluation can be made in each of these asset classes, so how can they go much higher against rising interest rates?

Second, the macroeconomic outlook for the US economy is not good due to its twin trade and budget deficits. It is a matter of simple arithmetic that the US can not live beyond its means for many years before debts become unworkable, and this is one reason for the falling US dollar.

Third, the US Presidential Election is over, so the political forces that have been sustaining an artificial state of confidence have gone home for the next two years or so. This means that the Day of Reckoning is just around the corner.

So what should a prudent investor in the Middle East do in 2005? Nothing is the short answer. Close down positions and lock up cash, perhaps diversifying in to non-dollar currencies and precious metals.

There is also a case for examining local capital markets, although here too valuations are looking overstretched and vulnerable to a correction. Real estate in certain markets may offer short to medium term opportunities, though rental yields and prices have tightened considerably, removing the chance for quick profits.

The good news in this portfolio strategy is that you live to invest another day. Once the major Western financial markets have been through a substantial correction phase there will be great opportunities - but only for those who have been prudent enough to safeguard their assets through the downturn. Most people won't do this.