If you invest in the stock markets and recently you’ve had to check your portfolio with a stiff drink, at least you’re not alone. According to the FT:

Stock markets finished their worst quarter in more than five years on Monday with further losses as investors continued to favour less risky assets.

The losses have seen many equity markets enter bear market territory – a fall of 20 per cent from recent peaks – over the last three months as a result of deepening fears about a US recession and continued tensions in credit markets.

For the UK’s FTSE 100, the S&P 500 index in the US and the pan-European FTSE Eurofirst 300, this was the worst quarterly performance since the third quarter of 2002, when accounting scandals at Enron and WorldCom sparked a global equity sell-off.

Of course, if you’re buying shares for the long-term than this is good news, although I agree it doesn’t always feel like it. Cheaper is better, remember?

In particular, Japan now looks seriously under-valued. The Nikkei 225 Average lost 2.3 per cent on the day, and finished at 12,525.54, down 17.4 per cent on the quarter. It was up at 18,000 just a year or two ago, and around 40,000 at its late 1980s peak.

The trouble with Japan is companies pay very low dividends, which makes it impossible to construct a dividend-based portfolio. This means you have to sit around hoping the index goes up again, with no income in-between. An expensive waste of time, recently.

Ireland is falling. The US is plunging. After 15 years of house price growth and five years of house price bubble, is the UK housing market aksi turning downwards? Will Elvis finally be spotted on the moon?

Prices are certainly stalling, with a drop of 0.4% in London last month according to the Land Registry. Not much after the stupid and socially divisive rises of recent years, but a start for those who’ve been astonished by their resilience.

Property indices never plunge suddenly in the UK; in previous downturns at least, they’ve more been chipped away at, like rental tenants wearing down a once-pristine buy-to-let flat. If prices do fall substantially, it’ll be through 0.5-1% a years (and with some positive months), not via a quick plunge back to sanity levels. (If you want to see the last five year crash in slow motion for yourself, you can download full house price data going back decades from HBOS.)

What’s more significant I think than the slight price wobble is that mortgage lending is being reigned in. If a banker is somebody who will lend you an umbrella when it’s sunny and then ask for it back when it rains, our banks see a monsoon ahead.

Now, a reduction in mortgage lending has previously been a great indicator of UK house price falls. But previously, such as in the late ’80s crash, that’s been because demand has dropped as people don’t want to buy houses any more. This time, mortgage supply is being constrained by banks trying to cut back on lending, either because of the risk or because of a lack of finance, even as they’re overrun by new customers who would have previously gone to the effectively neutered Northern Rock. So who knows how it will play out.

A further interesting new bear point concerns remortgaging. Nobody thinks about this in normal times as anything other than a formality and a chance to cut costs. But this time around, some buyers coming off very keen fixed or discount rate deals who have little cash are finding they are unattractive to the lenders offering lower rates. As a result, the rate they can remortgage is a sharp step upwards.

In extreme cases, the more unappealing mortgage holders might struggle to find a mortgage at all, or at least not one without punitive and unaffordable interest payments, which would then mean they’d have to sell their homes at the prevailing market price.

You don’t need to be the Governor of the Bank of England for the words ‘vicious circle’ to spring to mind.

House price falls are now the consensus view

When even an estate agent starts predicting 15% falls, we’re in new territory. After years of calling the market wrong and looking like a Wally (it was a word fashionable back when I first turned bearish on property… ok, slight exaggeration!) I’m wary of putting my cojones on the line, even now. But it really does look like the fat lady might be loosening up for a bit of shrieking.

How far will they fall? By my reckoning London house prices are 40-50% overvalued. Nominal falls might be partially masked by inflation over a period of years, but 25% or so lower from here by the time we reach the trough would seem entirely possible.

A quick update to my post of last week discussing Zopa rates rising because of the credit crisis. Rates have now come down - my main lending offer to A* customers is now out of the ‘Zone of Possible Agreement’ (ZOPA), which in English means people can get such better rates from other Zopa lenders that they’re unlikely to call on my money.

I would have to drop my rates down to around 8.25% to re-enter the ZOPA, which I’ve decided not to do for now. In these riskier times, I want some extra security from this sort of peer-to-peer lending, so I’m going to leave my money offered at that current rate and hope for another cut in supply in the weeks ahead.

Zopa sensibly pays you an okay interest rate on money sitting in your account, so you don’t have to rush. It’s a lot less than what I could get from actual Zopa borrowers, but this isn’t the time for hasty moves I feel.

So there you go. Gold has fallen, the stock market is up, and Zopa is possibly signaling the credit crisis is abating. It’s certainly proving an interesting new barometer to keep an eye on.

Apparently there’s still £30 up for grabs through Zopa’s affiliate scheme for new members, but do check if you decide to sign up, as the small print would seem to contradict this. If anyone from Zopa is reading, you might like to update those details?

So you’ve done your four basic sanity checks to ensure you survive the credit crisis: Your savings are safe, they’re earning at the higher rates of interest now available, you’ve got a plan to pay off any debt, and your mortgage is sorted for the foreseeable future.

Time to turn over and fall back to sleep?

Possibly… it’s usually a bit late to Do Something once a financial crisis is underway, and ‘Sell in haste, repent at leisure’ would be a good motto for us investors to pin above our PCs. If you follow the daily advice of the financial TV channels and churn, churn, churn with every wobble, the only person who’ll get rich is your stockbroker.

On the other hand, any financial crisis can be frightening, and the best way to fight fear is to be informed.

I think it’s best to calmly consider where you’re at, financially, and where you’re going, rather than fixate on screens full of red or speculation that the White House is going to have to be pawned off to pay down the US trade deficit. It’s an absolute certainty we’ll all encounter several testing times when saving and investing over our lifetimes, and cultivating a calm head will save you a fortune.

Stopping economic turmoil derailing your investment or retirement goals means keeping your eyes on the bigger picture, in good times as well as bad. Sure, it’s important to check your short-term money is secure (that your savings are safe, and that you won’t soon face a steeply higher mortgage bills, as I covered previously) but beyond that you really might be best doing nothing at all and waiting for the storm to pass.

Indeed, I’ve taken quite a general view with these four more longer-term financial health checks, since I’m absolutely certain I’ll need to refer to them again regarding some fresh crisis in the years to come!

1. Check your portfolio… calmly

At times of financial crisis, stock markets fall.

If you’ve substantial investments in stock market funds, general or sector specific, you’re likely well down.

Most sectors are hit, usually before any impact is apparent in the wider economy. Sometimes a specific sector hurts the most, as with the dotcom bust (although people forget lots of ‘bricks-and-mortar’ shares fell in the years previously, so it wasn’t quite so clear cut). The only consistent exceptions in this current crisis are investments related to commodities, and the market indices of countries dominated by miners and other commodity producers.

Has the world really changed enough to make a big supermarket retailer, a provider of networking technology AND a manufacturer of metal cans worth 10/20/50% less than a few months ago? Of course not. They were either overvalued then, or they’re undervalued now. Company specific falls in bull markets reveal bad news about the company, but general falls in bear markets tell you nothing about the company and everything about the market.

Note also that no crisis is all bad news, financially-speaking, since different asset types respond in different ways.

In this current credit crunch of 2007/2008, gold has risen. So have government bonds, such as US Treasuries and UK Gilts, due to their rock solid security. Corporate bonds have wobbled on credit fears, while interest rates on savings are up, even as Central Bank base rates in the UK and US have been cut, which is good for anyone with cash. Finally, house prices have started falling.

It’s because different assets behave in different ways in each crisis that experts urge us to diversify our portfolios, rather than putting all our money in stocks, bonds or property alone, or stuffing it all under the mattress. As asset going up will ease the unpleasantness of something else going down, just like the sugary syrup they put in children’s medicine.

What it means for us

• Collective investments such as funds and index trackers gyrate or fall when the stock market is unsettled. (During this current credit crisis they’re lurching up and down every week).
• Pensions linked to the stock market will also be down.
• Most investors’ current net worth will fall. If you’ve a big portfolio built over many years, the numbers can seem unreal and frightening when compared to say your salary.
• Diversified investing will reduce the pain.

Action plan

• Unless you’ve been silly (putting all your money into real estate, or tech start-ups, or a palm oil plantation, or some other overweight bet) the best plan is almost certainly to sit tight.
• Don’t sell just because the market falls. As Benjamen Graham said, just because a gloomy Mr Market has slouched up with a particular price on some particular day, that doesn’t mean you have to accept his price as final. Stock markets go up and down, and one day he’ll feel cheerful and generous again.
• If you sell every time the market falls, you’ll destroy your long-term gains…
• … unless you sell before they fall further, of course. But very few investors can consistently time market drops, and in my experience those who can seem to have trouble buying back in. As a result, few great investors are market timers. (For instance, Warren Buffet isn’t selling, and in fact he may be buying). Buying and holding over reasonable periods is a better strategy for nearly all of us, billionaires or not.
• If on sober reflection and several good night’s sleep you decide you really have overly exposed yourself to some particular market, consider slowly selling down your holdings. (Do consider though how you’ll feel if markets bounce back after you’ve sold out). With stock markets, it’s fairly easy to do this (which is why you should pause and think twice). With some assets, such as property, you’ll need to plan your disposals more carefully.
• Read up on asset allocation so you’re better diversified against future downturns. One very simple rule of thumb is to subtract your age from 100: hold your age in various bonds and the rest in shares. Some advocate an even simpler 50/50 ‘lazy’ strategy. The excellent My Money Blog has a fantastic primer on different asset allocation models. It’s US focussed, but the principals will apply in other countries, too.

2. Consider buying more shares while they’re cheap

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I’ve just been checking out my Zopa savings account, where I’ve noticed interest rates are going up. I only ever lend to A and A* borrowers (people with great or better than great credit records) and the rate Zopa is quoting me as competitive is much higher than usual.

In fact, in the A*, 24-month market, I seem to be in the zone with an interest rate of 10.5%, which Zopa estimates will give me 9.5% after bad debt.

That 9.5% is almost 50% more interest than on the best savings accounts available from banks at the moment.

I’m gob-smacked.

• Previously Zopa’s edge on normal savings accounts has been more 1-2% above the High Street banks.
• The Bank of England is cutting interest rates, so this is a chance to ‘lock in’ a higher rate.
• That 9.5% is close to my expected returns from the supposedly much riskier stock market.

So should peer-to-peer Zopa lenders be filling their boots?

A quick Zopa primer

I’ve been meaning for ages to write up my experiences with Zopa, but a quick primer will have to suffice for now.

Zopa is a peer-to-peer lending site that’s been going in the UK for about three years, and recently launched in the US, Japan and Italy. It’s completely legitimate in terms of its business (although some criticize its business model!) It’s been covered by both the BBC and the FT.

Set up by experienced bankers who created Egg in the UK, the best analogy is it’s sort of like an eBay for money. As a lender you offer loans to members, while other members borrow money. You get access to the same credit checking the big banks use (or don’t use), and there’s (theoretically) all manner of checks and balances built-in to enable you to see what kind of rate you’re getting.

The big difference between putting money into Zopa and a normal savings account is that you can lose your money with Zopa.

There are safeguards against this – you might choose to only lend, for example, £10 to each borrower, and bad debt is taken into account in the expected returns – but it’s still a crucial difference. On the other hand, I’ve not yet had a bad debt, and nor has a good friend who has been a lender with Zopa for over two years.

I still plan to write a long post about Zopa soon, as it’s really fascinating. If you want to know more before reading on, check out that BBC story on Zopa.

So, should I lend money like crazy at 9.5%?

Clearly, the credit crunch is having an effect on Zopa’s peer-to-peer lending market, either by:

• Increasing the number of Zopa borrowers, and so decreasing the pressure for lenders to compete via reducing rates.
• Reducing the number of lenders, and so reducing the range of offers for borrowers to choose from.
• Making lenders nervous, so we’re all raising our rates.

Plus I see a fourth, really unpleasant possibility:

• More lower-quality (or even dishonest) borrowers are coming to Zopa.

Which is it? I wish I knew. If I could be certain those A* borrowers wouldn’t default in droves in the next 24 months, I’d take a 9.5% return like a shot. Certainly, if a big High Street bank was offering that interest rate, I’d sell down some of my shares to take that as a guaranteed return.

But Zopa lending is not guaranteed, and that’s a very big but indeed.

I’d say the likeliest cause of the rate spike is a combination of all of the factors I mentioned above. Rising rates in a system like Zopa make sense even if rates are falling elsewhere, because lenders like me always have the opportunity to just stick our money in a bank account instead if we’re unsettled, and will demand more return for taking the risk. And if Wall Street and the City is nervous about lending money because of rising bad debts, we should be, too.

On the other hand, my A* borrowers are (theoretically) the creme de la creme of customers. You can lend to sub-prime borrowers at higher rates on Zopa, but I don’t. So the risk of a mass default for me should be small.

The biggest issue for me is Zopa has not yet been tested in anger. We haven’t yet seen how individual borrowers will behave in a peer-to-peer system if money really becomes tight. With some economists predicting a 1980s-style recession in every way except the shoulder pads, that’s a very real risk.

On balance, I’m going to increase my lending a little, but not go crazy. I originally explored Zopa as an experiment, and it’d be terrible to discover that I’m the unfortunate guinea pig should the experiment turn sour.

If you want to know more, visit the Zopa website, or read this FT article. (Zopa links tell the site I sent you, which at the time of writing can give us both £30 if you do choose to lend or borrow. Which is nice.).

We can’t wish away the credit crisis. However sensible you or I have been with our investments, borrowing and spending, we can’t wind back the clock and stop bankers throwing money at poor people who’ll never be able to pay it back, and who are often now paying a far higher price – repossession, dislocation, or even bankruptcy.

The bankers did it, everyone got cold feet, and now we all have to live with the consequences.

However rather than putting on The Smiths, pouring myself a large gin and tonic, and turning to Sylvia Plath, I thought it’d be more useful to assemble a checklist to help you avoid suffering too much fallout from this banker bungling. Who knows, you might even come out of the credit crunch richer! Personally, I’ll be happy with older and wiser – and not much poorer…

Today I look at personal finances. Tomorrow I’ll offer quick checks on investment, your income and more, so please be sure to subscribe to my feed.

1. Get out of debt

Because of the credit crunch, money is becoming more expensive.

I’ve written before about why you must get out of debt. But with the credit crunch being described as a great ‘deleveraging’ (in human speak, banks are reluctant to make new loans, and may even be calling them in), borrowing money instead of saving to buy things is getting even more expensive.

What it means for us

• If you’re already in debt, I’m not saying your bank is going to call you up tomorrow and demand all it’s money back. Rather, the climate is turning against borrowers for the first time in years.
• Banks are increasing loan rates where they can.
• They are less willing to enable customers to shuffle debt using cheap balance transfers.
• They will look much more carefully at impaired credit records, which will be a factor if you’ve been missing payments.

Action plan

Get out of debt, ASAP. Normally blogs work best when writers tell you personal stories, but I hate debt with a passion and have avoided it ever since I left college. If you’re struggling with debt, one of several good blogs on the subject is Blogging Away Debt. (But please comeback soon!)

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Am I the only investor sick of hearing financial industry insiders bleating that the US Federal Reserve must do more to ease their pain? Am I the only stock market investor who would like to see the world’s major indices fall hard to purge and punish the companies – and polices – that set the stage for the credit crunch?

Apologies to my regular readers for what really will sound like a rant. But responsible investing for the long-term by implication means taking an interest in – and having faith that – the market system will not destroy itself during your lifetime through greed and incompetence.

This current debacle is the most serious threat to Western capitalism since the Berlin Wall came down. So please, let me explain why I’m angry.

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Space operas are exciting, with droids, blasters and galaxies far, far, away. Financial advice is often dull, and focussed on doing without, dying, and matters down, down to Earth. Is it any wonder millions more of us watched the lamentable Episode 1: Phantom Menace than will ever read The Millionaire Next Door?

But what if Star Wars could teach us something about personal finance? Well, read on to discover what the classic trilogy’s major characters know about money.

(Note: I’ve ignored all the characters from the ‘Trilogy of Shame’, even the good one(s). If you know where Jah Jah Binks or Count Dooku would stash their cash, I’d love to read your thoughts in the comments below).

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While many people have made a fortune out of property in the UK over the past few years, some have lost a packet – even as prices continued to rise. These are the so-called ‘Sell-to-Rent’ brigade, who attempt to time the peaks and troughs of the house price cycle by selling their home at the top and then buying after the presumed house price crash.

With prices finally wobbling and the credit crunch making terrible headlines every day, now looks a great time to sell-to-rent. Flog your home for £350,000 and you might be able to buy it back in five years for £250,000!

Happy times? Perhaps, but remember:

• 2005 looked a good time, too (prices dipped slightly when interest rates began to rise)
• 2003 also looked a promising time to sell (the onset of the second Gulf War led to a plunging stock market and global gloom)
• 2001 saw the earliest sell-to-renters make themselves known (this was around the time that London property first passed through its long-term price-to-earnings average, which has historically been a good barometer as to the future direction of house prices. It’s proven very unreliable in this era of low interest rates)

Now London property blog The Rat and Mouse notes that the sell-to-renters are back, going on to warn that:

Few financial decisions are as risky, or real-world calculations as tricky… taking in the cost of storage, rents (which can go up and down), the costs of selling and buying, the value of time, inconvenience and risk, all multiplied by however long it might take for prices to start to drop and then assuming it’s possible to buy in just before everybody else does. The chances of getting all this right are low.

Too right. I’ve not sold-to-rent, but I hold my hands up as a would-be first-time buyer who has sat out the property market for several years now, most recently believing that property prices are unjustifiable if you compare mortgage costs with rent.

It’s been a costly error. You gamble with the Great British love of property at your peril.