The financial world has been rocked in the past month with financial institutions that everyone thought were safe falling apart. Panorama, on Monday 22nd September, told the story of a man who invested all of his money in HBOS shares, only to lose 80% of it in the last 12 months or so. Who would have thought you could lose money investing in HBOS?

Lehman Brothers bank failed in the US, and AIG, the world's largest insurance company, was propped up by a massive $80bn loan from the federal government. Lloyds TSB scooped up HBOS in a move that the FSA and the Monopolies Commission approved without so much as a second thought.

The media has been awash with explanations and discussions. I recently heard about a famous journalist, who shall remain nameless, say: "The financial markets are collapsing - it's the best story that I've ever seen." So with sentiments like that, it's easy to see how the financial markets, which depend on confidence, have been rocked by media and stories that cause the worst to happen.

So, what should you do in these uncertain and scary times?

First of all you need to understand where the risk is, so let's look at the protection that you do have.

Funds on deposit

If you hold your money on deposit then you have protection for the first £35,000 in the institution. The protection is per person, and so a married couple will be covered for up to £70,000 in total. It's also per institution, and by this I mean FSA registration. At the present time, HBOS and Lloyds TSB have separate registrations with the FSA, and so you get protection in both banks. If their registration changes, which is likely, otherwise what's the point of merging, and they have only one registration, then you have only one set of protection.

Therefore, rule number 1: no more then £35,000 each with any FSA registered company.

Funds invested

Here I'm referring to "collective" investments, such as unit trusts, OEICs, SIPPs, etc, not individual shares. If you hold collective investments, all of your investments are ring-fenced and protected. This means that if you have Fidelity investments, for example, then if Fidelity went bust, your investments are safe.

Some collective investments are not fully protected, such as some ISAs where the protection limit increases to £48,000, which is made up of 100% of the first £30,000 and 90% of the next £20,000.

Therefore, rule number 2: use collective investments with total ring-fencing.

Money in insurance

Investments held in insurance contracts, such as investment bonds and pensions, have the first £2,000 protected plus 90% of everything else.

Rule number 3: use insurance where you can; it's safer for large investments than money on deposit!

Pay the cost of a real guarantee

If you want a 100% guarantee, you need to invest in government-backed stock. That means National Savings or gilts. Most people don't invest in these because they pay a relatively low rate when compared to the market, but you must accept a lower rate for the guarantee.

Rule number 4: if you don't want risk, invest in the government and accept lower returns.

But what about investments?

Yes, what about investments? If you invest in moneys (by this I mean shares, property and commodities), their value increases and decreases depending on the demand for them. Sometimes they will pay an income or a yield as well. Should you invest in them - or, more probably, should you stay invested in them?

There are two real questions here: how long before you need to spend the money, and do you want to take a risk?

How long?

Everything you have ever seen about investments shows you that over the "long term" they produce better returns than deposits. Intellectually we all know this, but sometimes we are not ruled by our intellect, we allow our emotions to rule us.

Unless you are saving to buy something specific at a future time, then you will be invested for the rest of your life. Or at least until the money is needed to pay for your care when you become a gibbering wreck because of the stress the financial markets have put on you!

Unless you are really, really old already, then the rest of your life will be a long time. This means that you should be invested in the markets. But NOT as the man in the Panorama programme did. He invested not only in just one asset class, but also in just one stock. Simply, this is bad investing. The only protection that you have in the investment world comes from a spread of investments - an asset allocation strategy. We have mentioned it before, but perhaps it is now more clear what we mean.

Rule number 5: asset allocation always works over the long term.

What risk?

We all know that you should buy low and sell high - the problem is that no one does that because it's too high a risk. On Tuesday 16th September, when the markets fell by some 4%, you should have invested heavily. Of course none of you did. Why? Because you were scared that the market would fall more. But then what happened? The markets recovered by the Friday, so anyone having invested then would have made 4% in two days. And what happened next? The markets fell again - but would you have sold by then? Of course not.

The investment strategy of buying low and selling high does not work, simply because we never really know when we are at the bottom and when we are at the top.

Rule number 6: don't try to time the markets, you can't do it!