credit-crunch

More evidence that house prices are really falling comes from the Nationwide building society, in its latest official house price index.

While it tries to draw attention more to annual figures in the accompanying commentary, which are still very much up, the quarterly figures for January to March 2008 are dreadful. House prices haven’t fallen across every region of the UK like this since the early 1970s:

A few points:

• The negative spin would be that just as the bubble had spread out across the whole of the UK (instead of it being only London and the South East that went crazed, as in previous years), this time it’s bursting everywhere.
• If you were more bullish, you might say the uniformity of the falls reflects the impact of lenders making mortgages more expensive, rather than any particular changes in demand…
• …but still, doesn’t that drop in Northern Ireland of 10% have all the hallmarks of a bubble bursting?

You can download the first quarter 2008 figures from Nationwide as a PDF, or just the figures for March.

Stock markets have been falling for months, led by a collapse in confidence in the financial system and plunging bank stocks. In the UK we’ve seen Northern Rock crumble, while in the US the investment bank Bear Stearns lived up to its name after jitters led to rumours which led to a run on its assets, ultimately forcing it towards bankruptcy and into the arms of JP Morgan.

I happened to watch some of Washington’s investigations into the Fed-backed buy-up of Bear Sterns on Bloomberg yesterday. The CEOs of both Bear and JP Morgan were there to account for themselves, sitting side-by-side as if in some slow bit of a Shakespearian tragedy. (You can read JP Morgan’s testimony over on Forbes).

I’ve also watched Fed chairman giving evidence in recent months defending his attempts to alleviate the blockage in the credit markets, and his deep cuts in interest rates.

What’s all this mean, apart from that I need to get out more?

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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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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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Last night Alastair Darling, the UK Chancellor, guaranteed 100% of savings in Northern Rock – and indeed the Financial Services Authority has since gone further, stating this guarantee extends to other troubled financial institutions that might emerge in coming days.

Given the scenes we’ve witnessed since Thursday’s news that Northern Rock required a lifeline from the Bank of England, many will think it’s a good move. And sure, the decision will probably quieten the recent financial upheavals. It will certainly get the government off the hook for now (and to be clear, I don’t believe the government was responsible for the problems in the first place).

But it is without precedent in the UK, and has potentially serious consequences that sound academic but which in extreme cases have previously led to unpleasant upheavals of the blood and barricades variety. What’s worse, the guarantee has for now come without any balancing regulation to ensure the banks do not abuse the facility for their own ends.

At the very least then, a move designed to bring short term confidence to the UK banking system will prove embarrassing for years to come, with consequences for all of us in Britain who save, borrow and spend. Everyone, in other words.

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As I write, people are queuing outside a major British lender, Northern Rock, to take all their money out. Only in Britain would a run on a bank see customers forming an orderly line from the back.

Reading comments in the press, it’s clearly something that many people never expected to see in their lifetimes. Certainly, frightened customers demanding their money from a bank they fear is going bust is a scene you’d more expect to see in black-and-white images from the 1930s rather than on the Six O’Clock News on a flatscreen TV. But that never meant it couldn’t happen.

Indeed, the belief that instability and crisis is something that only ever occurred in some unreal yesterday is exactly why financial markets turn in cycles (if you wait long enough) and crises repeat themselves (if you read back enough).

Is it blind panic to take your money out of Northern Rock? Not necessarily. Perhaps many Northern Rock savers are panicking, but taking your money out is also a perfectly rational choice.

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