If you want your bard to use an instrument in combat why are you using a shield I have to ask. Many other classes can use shields but lots of characters don't actually do so. Its only an option. For your character I would drop the shield and you will be able to play in combat easily.
I obviously want the shield for the +2 AC because I am expected to be in the thick of things from time to time (we are only 3 in our current party), and I want to play an instrument because it improves the role play, the story, it personifies the character ... whether I'd cast a spell that requires a M using a component pouch or be allowed to switch weapon/instrument, the end result would be the same.
Ex 1 - According to rules:
Round 1: (Bard with shield) Sheath weapon, pick up component from pouch, cast spell (V,S,M)
Ex 2 - According to rules:
Round 1: (Bard with shield) Sheath weapon, ...cast spell (V,S only)
Round 2: (Bard with shield) Pick up lute, cast spell (V,S,M)
Ex 3 - What could be
Round 1: (Bard with shield) Sheath weapon, pick up lute, cast spell (V,S,M)
Hence, for example 1 and 3, the end result is the same, only the spoken words of the player changes :
Ex.1: "I sheath my sword, grab a handful of fine sand in my hand and throw it towards the enemies and put them to Sleep (V,S,M)
Ex.2: "I sheath my sword, grab my lute and start playing a relaxing melody to put them to Sleep (V,S,M)
Same end result, different interpretation ..some might like the former, some the later, but if you like the later, you can't do it because the rules make it that you'll have to wait for the next round to do that just as described in Ex.2
Anyway, this was a good discussion, and exactly what I was looking for! I wanted to know the consensus on the topic and I see that it's divided, that there is no clear preferred method and that basically it's up to each table to decide what they want to do with it ...Thanks everyone for contributing !