The problem is that current approaches aren’t truly global in scale. Climate change is a macro scale problem, and as a global phenomenon it should be approached with clear singular broad brush targets in mind to which a value can be attached.

With a clear valuation, carbon can become as well established as any other asset class trading on international markets, driving badly needed investment and innovation; it’s an integral part of our energy intensive economy which can only increase in value. A few years ago most investors couldn’t consider gold to be an accessible asset class, enter the ETC.

The actual valuation price of the initial offering can be debated at our leisure in the same way as every other in the market, at least the system will have started doing it’s work.

I’m hoping that the forthcoming meeting in Copenhagen will result in a more realistic approach and scale of carbon trading, let’s hope Tony Blair’s recent optimism about the meeting isn’t misplaced.

I think that this is the basis of investment, but there’s a fine line between investing and gambling. It’s a matter of risk perception and probability; professional gamblers know the value of the safety play.

There’s always the temptation to take that single large punt on a risky investment in the hope it’ll pay off big… against all rational odds.

If it succeeds, we’ve a tendency to take on greater risk in the future. Eventually probability will catch up with us, and those risks generate a single crippling loss: the hallmark of a bubble.

If we failed at the first attempt, we’re left sitting on a massive loss, so what have we got to lose? Things can’t get any worse, right? This is probably what a lot of financial stock investors were thinking whilst they averaged down.

This is a slippery slope: do you give up on these risky practices, and try to slowly walk back into profit, or take one last risk in the hope that you can make it all back at once?

Personally, I prefer to think of myself as an investor, and the slow, steady, and above all balanced approach best suits my conservative tendencies.

During the last bull market, some geographical regions, such as emerging Europe and Russia, accelerated well ahead of the rest, I failed to diligently rebalance and paid the price. I’d have more money to reinvest now if I’d thought about it.

Whilst rebalancing these runaway sectors, I’ll give closer consideration to reducing my whole portfolio, maintaining the target allocation of course. Liberating cash in this way is something large fund managers can rarely do, so I intend to use this advantage next time round.

Clearly, not all corrections are going to be as drastic as the Credit Crisis, but for those lesser moves I’d aim to stay fully invested. None the less, rebalancing out performing investments and holding back new cash may be appropriate.

I hope that reducing holdings, along with the stockpiling of new cash, will enable me to capitalise on future bear markets.

This combination sounds a little contradictory, since asset allocation is the response to the perceived impossibility of deciding on price in a random walk down Wall Street: you can’t consistently outperform the market.

Whilst I don’t entirely subscribe to this sentiment, I believe it has good applications at the core of a portfolio comprised of these asset classes.

• Equity based mutual funds, diversified both by size and geographic region.
• Commodities based on ETCs.
• Geographically diverse corporate and government debt.
• Mutual funds directly invested in commercial property. If asset diversity is the goal, investing in property stocks doesn’t really cut it, they’re still equities.

This core represents about 80% of my portfolio, and I use fundamental analysis, alongside the actual asset distribution, as a method of timing my rebalancing and adding cash into the portfolio.

Fundamentals are key to actively managing the remaining 20% of my portfolio, which is mostly invested in UK equities, in the form of individual company stock, and both long and short index tracking ETFs.

This strategy remains unaffected by the Credit Crisis, but my execution has changed in two main respects; being honest with myself about objectives, and active use of cash within the portfolio. These will be the subjects for a couple of future posts.

Whilst re-evaluating my investment portfolio in the wake of the Credit Crisis, this rule popped into my mind. I wondered if the finance industry will need to start applying it to their future activities.

The over-use of complex derivative products contributed significantly to the carnage, after all, if you can’t work out the value of an asset it seems obvious that that asset is too complicated. It’s also questionable whether some of these derivative products could ever have ‘worked’.

The complicated nature of these products allowed firms with an expertise in them to generate large profits. However, derivatives and securitized products are also difficult to value; these difficulties would eventually result in many firms having much higher levels of risk exposure than they had intended.

How does this apply to my personal investments? I’m carefully considering whether any aspects of my asset allocation strike me as too clever and what exactly my definition of ‘work’ represents.