Forget cheese, who moved my correlation?

"It's not fair" might be a good way to summarise 2008. All that "hard-earned" money invested into world-record-breaking asset class plummets. Worse still: the rules of diversification suggest that we should have been investing our eggs in a number of different baskets. What we didn't know was that all the baskets would be dropped.

For governments, regulators and the investment industry, it is egg everywhere, not just on the face! Such unprecedented change requires a superb attitude to deal with change - in the manner of Johnson and Blanchard's Who Moved My Cheese?

For the man-in-the street, two of the standout lessons include: for financial planning, living within your means; and for portfolio planning: recognising what "opportunity" means in the current and on-going fin-ancial debacle.

The two connect in that while asset values are being re-assessed, the only asset of any "real" use is cash.

Lesson One is for financial planning and should read: who moved my credit card? The winning attitude for 2009 is the one that forgets bulls and bears; this is the year of The Bore.

New car - why? Upgraded settee - what for? New telephone - who are you trying to impress? What the layman has learned from 2008 is that debt has to be repaid. Even the "going bust" Woolworth's are selling not just the last of the stock, but the shelves that held them. Such is the unrelenting power of debt. It won't go away, however, hard you blow.

Top tips for debt management are the same ones from the year 1908 to 2008. The difference is that YOU MUST LISTEN.

As I say, the Year of the Bore. Why? There are few gurus calling a near-term end to the recession. Some are banking on a depression. The difference? A recession is when the real-estate industry loses their jobs; a depression is when you lose your job.

In these circumstances, top-tips on financial planning are: First, living within your means, actually means keeping debt servicing within one-third of your income. Include car and student loans, credit cards and mortgages.

Credit cards

Secondly, as credit cards charge way more than the growth of your asset portfolio, forget credit altogether and bring it under control. Any reduction in credit is an overall improvement in your net worth!

Lesson Two could read: who moved my correlation? These are turbulent times - the whole process of valuing assets is under review and until banks lend to each other (never mind lending to you and me) the value of every asset will remain subject to traumatic change.

What do you do? Panic? Hold the "brace" position? Or take an alternative route if you can? According to market-humour, it is too late to panic: "When markets crash don't panic; but if you do, make sure you're first". The first "panickers" are well out of the markets.

Point One on the Turbulent Times Emergency Landing Card (TTELC): don't panic - if you are selling to consolidate losses make sure it's for the right reasons. That leaves us with "holding the brace position" or taking an altogether different route.

The critical component of lesson two lies in recognising that wealth is relative. Back to market-humour and the guy who moans: "I have lost half my assets - but I've still got my wife!"

Normally, catastrophic losses are precipitated by personal trauma (like a divorce). A key characteristic of today's crisis is that it affects everyone.

Point two on the TTELC is: we are in this together; if wealth is a relative-thing then holding onto a minus 30 per cent position (and the wife) might actually make you relatively better-off especially if future investment decisions are focused on buying "whilst blood is in the streets".

Many will feel that for old-money "holding the brace" makes sense because much of the worst has already happened; many will look for the alternative routes now, because they fear further market carnage. Or they have cash and can buy cheap.

The current wreckage is an insight on what to do next. Capitalism was the vehicle most investors were travelling in. We now know that capitalism got caught up in what Green-span called a "financial tsunami", where the banking system nearly collapsed in one crisis and was, unusually, followed by an economic crisis.

Looking at the wreckage is all about comparing the liquid assets during "normal capitalism" with today's wreckage-opportunities (abnormal capitalism).

Figure one represents a street-map of "normal capitalism" where all the asset classes do what they are supposed to do in respect of performance and time.

Figure Two represents some of the opportunities arising from today's abnormalities. You can get well lost with an abnormal map, but as RMB's Glyn Owen says "crisis is when the scared hand wealth to the brave".

In our "normal map" cash (bank deposit rates) follows inflation. Normally, cash is a means of exchange and a store of value which is why bank deposits track the rise in prices.

Not any more. Its current scarcity makes it the hottest of commodities. In normal economic downturns "cash is king" say the risk-adverse; today's premium paid for liquidity makes cash "King Kong".

In our "normal map", bonds are debt issued by governments or institutions. They still are, but, pricing has changed massively. "Bonds - the new equity?" is a header we quoted last week from Brewin Dolphins recent bond update by Peter Smart.

The point he makes is that "normal" bond yields over the life of an investment grade bond would be something like 5 per cent to 10 per cent per annum.

Today's investment grade bonds (not junk or high yield stuff) can be found at over 20 per cent lifetime yields with up to 50 per cent price discounts. The vagueness of equity maturity looking pale against the definitive maturity of bond dates. Just don't forget the default risk!

Then you have equities. In trying to remember what "normal" was it might be worth revisiting the middle of 2008 when market commentaries generally saw equity valuations as not stretched; there were few predictions of a "bubble bath".

All that changed when Lehman went bust.

Pre-Lehman: corporate earnings and publicly listed balance sheets looked strong. In them distant days, the value of equity had a lot to do with the fundamental strength of the balance sheet and the expected earnings of the company.

Today, equities are valued on the basis that they are the most liquid of assets, they can be sold and therefore they are. The abnormal banking/financial crisis has led to an abnormal and highly indiscriminate selloff with a high degree of volatility added into the trauma.

Under sensible definition, current equity valuations are abnormal.

This abnormal crisis has led to today's abnormal pricing of cash, bonds and equities. That abnormal pricing leads to abnormal definitions. The key question is: how long will "abnormal" last?

We are past the first obstacle: the commitment of government to creating liquidity. We are into the critical and difficult-to-measure next stage: the period when banks lend to each other; a pre-requisite before they lend to the real economy and the man-in-the-street.

When banks get back to actual banking cash should be restored as a means of exchange with equity and debt risk re-priced accordingly. What we don't know is: when will all this happen? As the resounding answer is "nobody knows", we are left with our two salient lessons.

Lesson One: Reduce debt and control spending. Assuming that asset-investment will not keep pace with negative credit card debt is a safe place to start.

Lesson Two: Assumption has to be made that normality will return. The challenge is to work out how to benefit from current "abnormal pricing"; three areas need investigation: the liquidity premium; debt and credit markets; and the market timing opportunities in both equities and commodities.

- The writer is Chairman of Financial Partners and Mondial