It would be churlish of me not to write something this week in relation to those two infamous words “credit crunch” in my first Friday column.

We all know billions of pounds have been wiped off the value of investment and pension funds after a year of turmoil in the stock market with the FTSE 100 Index of leading shares plunging by more than 2,700 points from mid-2007 highs.

House prices have also been heading south, falling 13 per cent in the past 12 months, according to the Halifax house-price index. I won’t go on - but if you want more bad news pick up almost any financial publication you wish and feed your pessimism.

I do not mean to belittle what has gone on during this annus horribilis – there is no getting around that almost all investor portfolios have been hit, and hit hard. However, if you are a medium to long-term investor – as all should be with regard to real asset based portfolios – what is the first thing you should be doing?

Do not panic is the first priority. Balanced, diversified portfolios should have room for emergency funds (i.e. liquid money in cash) which you should call on if necessary. However, cashing in your investments now should not be on your agenda in most circumstances unless absolutely necessary as you will be crystallising losses made during the last year or so.

Many of you may remember the last bad (sorry, dire) period for investments, 2000 – early 2003. Investors able to ride out this period were rewarded with fantastic returns from 2003 to mid- 2007.

It doesn’t take a Sherlock Holmes to work out we are heading for (if not already in) some form of recession. But provided that we avoid a depression or Armageddon scenario (and global leaders have followed Mr Brown’s recent lead in doing their utmost to avoid both), we could well witness a significant recovery for those able to be patient.

Yes, inflation is over five per cent; yes, unemployment is rising and will no doubt continue to do so. Again it is no shock to anyone that people in the City and property sector are losing their jobs, surely?

No, banks are still not lending to each other, or us, at the levels needed although there were signs earlier this week that the wholesale money market was beginning to move again. The real economy is no doubt in for a tough time.

However, the economy and market indices are different beasts. It is normally fair to say that markets are priced six to 12 months ahead of the economy and upswings in indices often start while the economy is still suffering. Investors would be wise to remember this. Some investors say to me, “I’ll switch into cash now and when things have improved I’ll reinvest”. Switching into cash is a two-part decision, easy to go in – but when do you get out? Often, the first period of any upswing is the steepest.

History tells us that after the dark days of October 1973 to October 1974 pan-European equities rose by 60 per cent in the following 12 months. After November 1987, the same market rose by 29 per cent. Again after the 2000-March 2003 bear market, the index rose by 46 per cent (Source – Datastream/Citigroup).

There are two things to stress here. I would not be so brave (or stupid?) as to call this as the absolute, definite bottom of the market and advise investors to “pile in”. I do believe, however, that markets are attractive for new monies over the medium to long-term, i.e. a five to ten year view.

Secondly, the banking crisis has led to cash investments not being as safe as once thought – more on this another time.

When reportedly the world’s richest man, Warren “the Sage of Omaha” Buffett is throwing his weight behind US stocks this could give cause for optimism going forward – again, I stress over the medium to long-term as in this world of uncertainty you can be certain that short-term volatility will continue.

In an editorial in the New York Times last week, Buffett acknowledged that the economic outlook was dire and described the financial world as a mess. He wrote: “Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary”.

His conclusion? Buy shares in US companies!

“I have been buying American stocks. This is my personal account I am talking about, in which previously I owned nothing but US Government bonds. If prices keep looking attractive, my non-Berkshire [Berkshire Hathaway is his investment company] net worth will soon be 100 per cent in US equities.”

Most of Mr Buffett’s wealth is tied up in his company but his personal investments are thought to run into tens, if not hundreds, of millions of dollars.

This news follows his company’s recent $5 billion investment in Goldman Sachs with an option of a further $5 billion of new shares at any time over the next five years as well as a similar $3 billion deal with General Electric earlier this month.

In summary, our (and the global) economy is bound to be in for a tough time going forward but investors would do well to remember to make the distinction between the economy and the behaviour of market indices.

Existing investors? Try and keep a calm head and not to panic. Use existing cash reserves rather than selling (at or near the bottom?) real assets now.

New investors or those sitting on a lot of cash looking for good prospects for growth in the medium to long-term? Investing is not for the faint-hearted, especially at present. But those who can see beyond the short-term bad news will surely be rewarded in the future from current valuations.

* Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull.

Email: TILaw@montpeliergroup.com