For years we've been told diversity is the key to investing because while one asset class struggles, another will be doing well and level out the bumps for a consistent return.

Well, it looks as though we could be in one of those periods where cash is the only saviour. So it's time for an investment reality check to see where we are in the cycle.

Economy

The US is in recession (we just have to wait for the official confirmation) and it looks as if Britain will follow. Some believe both economies are in for hard landings as they suffer from the credit crunch and plummeting property prices. As inflation starts to rear its head, the US hasn't much room to move, official interest rates being so low. Lift rates to fight inflation and it runs the risk of pushing that economy deeper into recession.

As for the Australian economy, we're in much better shape than either Britain or the US for a couple of reasons. First, the Australian Government is flush with cash after a string of budget surpluses has allowed a series of slush funds to be built (future, infrastructure fund, education, hospital funds and so on). There is plenty of money to throw at the economy if we come to a screeching halt.

Second, while I still think the Reserve Bank went too far in the last back-to-back rates rises, it has room to cut rates if the economy slows too much. Our official rates are among the world's highest, so there is plenty of room to cut.

Third, there is the China and India argument. Economists say that while those countries continue to keep buying our commodities, the mining boom will continue and that will underpin the economy.

Economists reckon there is no sign of the boom slowing, and they expect it to continue for years. I'm not as confident on this front. Sure, China has a big domestic market to feed, but it is an export-based economy and if its customers in the US and Europe start ordering less because their economies are in recession, it must have an impact on China's growth.

Sharemarkets are also lead indicators on the health of economies and companies. It worries me that the Shanghai stockmarket is down more than 50 per cent since the start of the year, and India is down 40 per cent.

But with mortgage approvals dropping to an eight-year low and consumer confidence the worst since the 1991 recession, average Australians are preparing for the worst.? SHAREMARKET

When boring old listed property trust GPT gets into trouble I really start to worry.

Then there's retailing star Harvey Norman, down from more than $7 in November to $3, the banks continually pounded, and now even BHP is back around $40. The sharemarket looks ugly, even the energy stocks (which have cushioned the full impact) dropping back.

As I've said before, this 5000-point level on the ASX-200 will be a critical indicator. If the markets bounce up from there solidly, some experts will be happier. If the market drops below that, there is a lot more pain to come.

Now I know there are many investors just itching to get back in the market and take advantage of some of these "cheap" blue chip shares. But I'm not yet convinced. There are three things you can do when looking at the sharemarket - buy, sell or sit on the sidelines. I'm still leaning towards the last.

Some say the resource stocks are good buying, but while they haven't come down as much as others, they're still pretty expensive when you look at the uncertainties ahead.

If you can't help yourself, talk to your broker and maybe start nibbling at some of the blue chips, but I think it is just too dangerous to take a major position believing this is the bottom of the market.

Residential property

Banks have clamped down on financing, and auction clearance rates are terrible for the minority brave enough to openly sell. A mate looking for a house in Melbourne told a real estate agent he was disappointed with those available. "Don't worry," the agent said. "I've another 30 in this price range whose owners aren't game enough to publicly list them in this environment."

The best advice in residential property is just don't be forced to sell. If you're doing it tough with higher interest rates, do everything to hang on, because a forced sale could crystallise a big drop in value.

Investing for rental yield could be an option, depending on the property, but tread carefully.

Cash

Cash is king.

It's pretty hard to go by an 8-9 per cent guaranteed return in this environment, for the time being anyway.