Investor checklist as the gloom deepens

There are times when almost nothing works for investors. This is one of those times, and it may soon severely test your patience.

Stocks worldwide are suffering a relapse of their winter sell-off, with the Dow Jones industrial average Friday tumbling 220 points to its lowest level since mid-March.

Home prices continue to slide, money market funds and bank savings certificates pay pathetically little, and lately the market value of high-quality bonds such as U.S. Treasuries has been falling as long-term interest rates have jumped because of inflation worries.

Investors still are making money in many commodities, including oil, which refuses to end its levitation act. But in a diversified portfolio any gain in the commodity portion probably is providing a modest offset, at best, to losses in other investments.

The root cause of markets' turmoil, of course, is the troubled U.S. economy. Many investors believed the outlook was improving in May -- or at least that things weren't getting significantly worse.

Now, doubts about the economy are rife again, in large part because of the hit consumers are taking from the relentless rise in energy and food costs.

"The squeeze on consumers is as bad as I can remember in three decades," said Nick Sargen, who oversees $30 billion in client assets as chief investment officer of Fort Washington Investment Advisors Inc. in Cincinnati.

That's serious enough, but it's now paired with fears that the U.S. financial system is again at risk of being swamped by banks' loan losses.

The Federal Reserve hoped it had averted that danger in March by making huge new credit lifelines available to financial firms. But the loan-loss picture for many banks and brokerages has worsened in recent weeks, driving the companies' stocks to new multiyear lows.

Between the inflation threat and the potential for a financial-system meltdown, "There's just too much bad news out there" for markets to handle, says Brian Gendreau, strategist at ING Investment Management in New York.

That could make the next few weeks or months a nerve-wracking time for anyone with a nest egg.

How to cope? First, if you truly are investing for the long haul, and you're happy with your portfolio mix, realize that you may not have to make any changes.

But if your tolerance for a new round of paper losses is low, consider whether you should be paring back riskier investments -- while keeping in mind that it's never a good idea to be completely out of the stock market (because it can turn up as quickly as it can turn down).

Here are three of the most serious tests investors may face in the near term:

* Will U.S. stock indexes drop below their March lows? Most key indexes, including the Dow, the Standard & Poor's 500 and the Russell 2,000 small-stock index, hit multiyear lows on March 10, amid the first round of worries about a financial-system bust. As those fears abated after the Fed opened its lending window wider, the stock market rebounded from late March into May.