Staying safe is the key to investment now

Merrill Lynch's hugely comprehensive investors' survey published this week shows that investors are mainly intending to put money into equities, and have lost their appetite for real estate.

But is following the madness of crowds the best investment advice? History shows time and time again that investing against the majority pays off handsomely. So therefore exit when the crowd is piling in, and buy when it is scared stiff.

Strangely even the respondents to the Merrill Lynch survey seemed unimpressed by the outlook for equities, and just saw shares as the 'best of a bad bunch' of alternatives. What an indictment: who in their right mind would put money into an asset class in which they felt less than full confidence?

Indeed, there are good reasons to be less than entirely confident about the outlook for equities. US interest rates are rising, oil prices are still very high, the US has record trade and budget deficits and car sales are faltering in the US.

Last year the sale of US shares by company insiders was 60 times higher than share buys by insiders. That tells you that the people who actually manage corporate America think the outlook for share prices is negative.

What then are the alternatives? In the Middle East equities also look overbought, and the supply of real estate investment opportunities has greatly expanded. Meanwhile, global real estate and bond prices look unattractive.

That really leaves cash and precious metals and other commodities. But even this is not so easy, gold prices have fallen back 5% so far in 2005, and the dollar has gained ground against expectations of a stronger euro.

However, in an asset market implosion the best you can do is to park your money where it will suffer the smallest decline.

Gold bugs still have one good argument on their side. In the recent inflation of commodity prices around the world, gold has been rather left out, and is still only half of its previous peak value while other commodities are well past their previous peak. It could be that gold will be the next commodity to rally higher.

Bonds could also be a good call. Long-term US treasuries might look low now, but they could fall much further if equities crash and the Fed responded with interest rate cuts, as it did in 2000. Then bond prices could double overnight.

However, investors who rush into equities now seem to be taking a big risk with limited upside. Most will probably also hold on to real estate which they acknowledge to be a bad investment!