We thought things were bad when we saw Bear Stearns and IndyMac go under, but this past week has seen more financial casualties than both of those giants combined.  Thankfully, Bank of America is buying Merrill Lynch, but Barclays is still sitting on whether to buy part of Lehman Brothers.  The Fed has begun to bailout AIG if they accept the terms of that loan (interest at a staggering 11.3% - sorta like some of our credit cards!).  And yesterday there was talk that Washington Mutual might be the next bank to stumble.

I think this shows that the environment we were in back in March is definitely not over.  Clearly, Bear Stearns and IndyMac were not indicating bottoms in the market.  It makes sense to view this past week in the same way.  There is good reason to think that it’s also not a bottom.  So what should you do with your investments in the meantime?  If you own Lehman funds or ETF’s, I’d like to hear from you.  I’m assuming these are all being unwound somehow and it would be good to know more about how they do it.  Have you ETFs collapsed too?

Here are some of my quick thoughts and suggestions on what to do now:

(1) Especially if you’re an American, use the recent small rally in the greenback to buy other currencies.  The Canadian and Australian dollars, the British pound, the Brazilian real, some Yen and some Renminbi would all be good choices.  As for the amounts to allocate, that’s up to you.  You don’t know where the next currency strength is going to come from, but despite McCain’s comments to the contrary, the US economy’s fundamentals are most noticeably NOT sound for all the reasons that readers of many personal finance blogs already know about.  If you’re Canadian, don’t buy American dollars unless you know you’ll be travelling there.  Buy Australian and the other currencies above.

(2) Buy gold now that it’s cheap again.  Speculation has it that Lehman and AIG are unloading their commodities funds and this is part of the reason for the recent drop in gold.  Usually, gold will shoot up in a time like this.  Take advantage of this window (remember when gold just recently cost $200 more per ounce?  Ouch.).  Either buy physical gold if your supplier isn’t backed up with orders, or open an account with a company like GoldMoney that specializes in digital gold storage.  I’d stay away from gold and metals mutual funds.

(3) You might want to sell off some of your pure growth stocks if they’re still trading at decent highs. Take your money off the table while you can.  If a stock isn’t paying you any dividend and is just sitting in your account as a “paper” gain, I’d clean that up while you can still take a bit of a gain.  It’s not clear what financial institution will be the next to fall and how far its relationships will reach throughout the economy.  AIG is an apt case because it insures so many other large companies.

(4) Stick with consumer staples stocks that pay dividends.  Names like Johnson and Johnson have continued to do well up until this point, weathering out all the turmoil so far.  People still need to buy band-aids and hygenic products.  Similarly, Pepsi, Kellogg’s and Coca-cola sell junk food items (yeah, that’s what I consider many of those cereals!) that people will continue to buy.  It’s not necessarily unethical to buy these stocks with this knowledge.  After all, I bet you also drink some Coke from time to time and buy chips and probably Dasani bottled water.  Coke even makes those Odwalla healthy juices.  These companies are probably much safer bets than any American financial company.  On the other hand, Canadian financials, for the most part, are relatively safe bets if you stick with the more conservative banks (Nova Scotia, TD, National).  I’d stay away from CIBC, BMO, Manulife and SunLife currently.  It’s not clear yet how much Manulife is involved in the mess and how much it will need to write off.  SunLife is caught up in it too.  I don’t know enough about European financials to judge them, but Barclays sounds like it must be in a good position if it can buy up part of Lehman.

(5) Tighten up your budget and pay off at least one of your credit cards.  It’s easy to “yo-yo” on credit cards.  You pay it off, then load it up again, pay it off again, etc.  In order to break the yo-yo diet, you need to restrict your spending throughout and from now on.  Credit cards have some important and essential uses (such as for online purchases), but the way to wean yourself off using them in a routine manner is threefold: (a) cut your spending on non-essentials and impulse buys, (b) establish an “unexpected needs” fund in a high-interest savings account, and (c) establish a bevy of dividend-paying stocks that can flow about $100/month to you (or whatever number you decide would be a significant help in meeting these unexpected “emergencies”.  Note that here we’re not talking about your REAL emergency fund (for deaths, accidents, etc.).  You just need to take care of the slush fund of impulse and unnecessary purchases.  So I suggest paying off one card completely and keeping that aside as your “emergency fund” until you have a real emergency fund in place.  You’ll be less inclined to spend it, too, when you see how much money it can make for you.

(6) If you’re very close to paying off your mortgage and you know you want to stay in your house, I’d pay that off as soon as possible.  It’s very powerful to own your own house outright.  I don’t think now is the time to be using home equity for buying second homes, as some have continued to advocate throughout the last year.  If you need to, sell your second vehicle in order to cut expenses and bring in the extra cash.  If you sell off your growth stocks, you could put that money towards paying off your mortgage once and for all.

(7) Stay up to date on the financial news.  Don’t be caught off guard.  Watch the movements in the US dollar in particular.  I was away for a brief period at the beginning of this month and didn’t have quick access to any of my usual news sources.  I was shocked to hear about Lehman on my return just a week later.  It’s amazing how much can change in just a few days.

Your own situation will be different than everyone else’s, of course, but in general you want to find ways to increase your own security right now and not take on any risks that don’t have some immediate payback (such as income in the form of interest or dividends, or rental income from tenants).  Tighten up your own financial situation so that your own finances don’t look like those of the US Government.  Pay off people that you owe.  Pay for those purchases you made on credit.

What are your own plans for making it through whatever this financial storm is?  Do you think this is the bottom yet, or have these new developments surprised you a bit as they did me?  Leave your thoughts below or comment on it in a post of your own.