■ Hold a decent proportion of savings-account money in currencies other than sterling. The assumption that underlies all five must-do's is that most developed economies of the western world are in fundamental decline, which won’t be rectified by fiscal discipline or even supply-side reforms. If that assumption holds good, then an investor will want to restrict the amount he holds in a currency that's part of that decline.
That said, even if a currency is tied to an economy in structural decline, it can still be taken seriously. That's especially true of the US dollar because the green back is the world's reserve currency. This gives it a special status - the "exorbitant privilege" - which ensures a certain level of demand, so it makes sense to have some cash tied up in the world's reserve currency.
Then again, which reserve currency? The assumption here is that reserve-currency status is changing hands from the dollar to the Chinese yuan. This is simply because sooner or later the domestic currency of the world's biggest economy becomes the reserve. It was true of sterling; it's true of the dollar; it will soon be true of the yuan - or, at least, that's a working proposition that's sufficiently feasible to be worth acting upon. It's easier said than done, but UK investors can hold the yuan via 'synthetic' exchange-traded funds.
■ Only hold government bonds where they are, in effect, a risk-free asset. This is another way of saying that, where an investor holds a gilt-edged stock, he must be willing to run it to maturity and be satisfied with the return that's locked in. Conversely, if he thinks he might have to sell, say, a 10-year bond when it still has five years to maturity, it's not risk-free because there is no telling what its price will be then. Currently, the redemption yield for 10-year gilts equates to an annual return of 1.9 per cent (ie, including the built-in capital loss) and it's 2.5 per cent for 15-year gilts. These are paltry returns given that the average inflation rate is almost certain to be higher. But at least payment of coupons and principal is guaranteed and, in some circumstances (where investors are old enough and wealthy enough), it could be acceptable to run a gilt to maturity.
■ Avoid bond funds like the plague. There is a vital difference between running a bond to maturity and putting capital into a fund of government bonds. Under some circumstances, the former could be rational and the results acceptable; the latter will be a long trip to oblivion.
The assumption is that in the UK, as elsewhere in the developed world, interest rates must stay below the rate of inflation for many years - it's the most effective way of tackling the mountain of debt that is too high for governments and consumers to service and pay back by more honest means. In other words, the long-term bull market in government bonds is over and a bear market has begun. Quantitative easing may cloak that reality, but it won't change it. Given that, gilts prices will fall and bond funds - including those of the index-linked variety - will simply re-invest and re-invest as prices slip away. Holding a fund of government bonds will be a bit like putting capital into Japan's equity market 20 years ago - the start of a long process of self-immolation.
■ Prefer equities to bonds. Which of these two propositions looks better? An asset class where the running yield is about 3.5 per cent, there is no chance of the dividend increasing and the certainty of an 18 per cent loss after 10 years; or one where the running yield starts at 3.8 per cent, dividends can and almost certainly will rise and, on average, there is a two in three chance of values rising in any year. It's a no brainer, yet many institutional investors currently prefer the former category – government bonds because they are a ‘safe haven' (ie, prices of equities, the other category, are far more volatile). Yet in the long run equities will surely be the better bet, especially as the corporate sector, both in the UK and the US, is glowing with financial health compared with the personal and public sectors.
■ Invest in equities in the developing world, but know the risks. Essentially these are the flip side of the monetary risks that dog the developed world. Because 'developing economies' - which, much of the time, is a euphemism for China - lack financial credibility, their rulers tie their currencies to the world's reserve currency, the dollar. In so doing, they relinquish control of interest rates. The low interest rates that are fine for the low-growth US are wrong for fast-growth developing economies. Eventually they serve to foster inflation, unproductive investment and asset-price bubbles, which burst from time to time causing temporary mayhem. This is a price nations pay for becoming wealthy; for investors it can mean really bad losses every now and then, possibly when they are least wanted.
As the euro shudders and and panic is abroad, remember these five must-do epithets. They may provide a sense of stability. Enjoy.
