Don't buy at the top and sell at the bottom

Spring seems to be becoming the season of market panics. Last April we had the collapse of the dotcom mania. Now we're going through a further US-inspired sell-off, this time effecting companies from the "real economy" as well as those that were never going to make any money anyway.

Spring seems to be becoming the season of market panics. Last April we had the collapse of the dotcom mania. Now we're going through a further US-inspired sell-off, this time effecting companies from the "real economy" as well as those that were never going to make any money anyway.

It's not been all downhill - we've had dizzying gyrations in the last week. For instance on Wednesday the FTSE 100 swung from a 20-point gain to a 250-point loss, before closing down 94.8 at 5,625.9. This time last year the FTSE stood at 6,500, with many pundits forecasting 7,000 by Christmas 2001.

So, what to do? At the risk of paraphrasing Dad's Army's Corporal Jones, "Don't panic" isn't a bad starting point. It's too late to sell anyway. Shares should always be held long-term, when they provide by far the best growth of any investment. If you're really worried about short-term falls in share prices, say on a 10-year view, then you should question whether you should be holding shares in the first place. The same thing goes for equity ISAs.

I sincerely hope that The Independent's readers won't conform to that old City saying: "The definition of a private investor is someone who buys at the top and sells at the bottom". There are certainly plenty of people who piled into tech stocks in the autumn of 1999 who will now be piling out again, suffering losses of 90 per cent or more in the process.

Your gut reaction to falling prices may be to cut your losses, but before you do, especially if you are holding good, solid "old economy" shares, you should consider the following points:

First of all, 2000 was only the third calendar year that the FTSE 100 fell in value. On the last two occasions, 1990 and 1994, the following calendar year saw gains of 20.3 per cent (1991) and 24.9 per cent (1995). So if you are brave enough, now may be a buying opportunity. Remember Black Wednesday in October 1987? The FTSE All-Share Index was back to the level it had reached before the crash within two years and had more than doubled its pre-crash value within 10 years.

Furthermore, research has shown that equity market returns tend to be concentrated in a relatively small number of strong trading days. Some of the strongest rises tended to come immediately after sharp declines. Being "out of the market" puts you at risk of missing those strongest days and therefore a strategy of holding your investments for the long term may actually be the lower risk option. If you have researched your share purchases properly your selections should withstand a bear market as well as a bull market. Remember that share prices are falling due to a lack of confidence in the market as a whole and not because of inherent problems with the company in which you have invested.

Also, if you sell now, you crystallise your losses. They remain merely paper losses right up to the moment you flog them off. Therefore it is best not to sell shares when markets are low unless you are forced to for a specific purpose. If you hang-on, past experience shows that the market is likely to recover and you will be able to sell your shares at a better price in the future.

None of this is to suggest that a falling market is a pleasant experience for private investors. Comfort yourself with the thought that, if you hang on for the long haul, you will be doing what the professionals do and avoiding the old trap of buying high and selling low.

Last but not least, congratulations to my old pal Justin Urquhart Stewart, corporate development director of Barclays Stockbrokers, who is leaving after establishing the firm in 1986. Justin is off for a sabbatical and then intends to set up another operation of his own in the stockbroking industry.

I mention Justin's move because many of you will already have heard of him. He is an omnipresent one-man publicity machine, and his red braces can be seen in TV studios and conference platforms the length and breadth of the country, extolling the virtues of share ownership and the private investor.

In a long and varied career Justin has worked in corporate finance in Africa and Singapore, as well as electronic corporate cash management in Europe. At the time of Big Bang he helped set up Brokers Services, which has now become Barclays Stockbrokers, one of the UK's largest retail stockbrokers. His departure will be a blow to Barclays, and will no doubt have caused the champagne corks to pop at rivals like NatWest Stockbrokers and Charles Schwab.

Justin demurs to provide further details about his new venture, but knowing his unparalleled gifts for publicity, I am sure we will hear all about it when it happens.

j.willcock@independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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