Don't run screaming just because you glimpse a bear

Just as people had crept back into the market, the value of their investments plummeted. Sit tight, urge the experts: time's on your side
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The Independent Online

They were calling it all sorts of names last week.

The severe slump in UK share prices on Monday and Wednesday - the 170-point midweek fall was the biggest on the FTSE 100 index of blue-chip companies since September 2002 - prompted a slew of comment from City sages, investment gurus, fund managers and stockbrokers.

Desperate to get a handle on the tumbling UK index, as well as on slipping shares around the world, many simply branded it a "correction" of markets that had steamed too far and far too quickly ahead. In the same vein, "blowing away the froth" was another piece of City jargon invoked to describe the end of feverish bull-market activity.

Others coolly termed the slide "consolidation", while still more thought it was just a bout of "predatory profit taking".

But for many individual investors, the share price slump had a less professional and rather more emotive name: panic.

Throughout the week, a number of Independent on Sunday Money readers got in touch to ask if they'd made a huge mistake by investing recently in an equity individual savings account (ISA), and whether they should sell.

They are among the hundreds of thousands of Britons who, buoyed by three years of rising markets, have been creeping back into shares, particularly UK ones, after getting their fingers burnt during the late 1990s when the dot-com technology bubble burst. With confidence restored, sales of equity ISAs nearly quadrupled in March this year compared to 12 months ago.

However, last week's steep falls in the FTSE 100 sparked fears that this confidence might now evaporate and spook nervous investors into dumping equity ISAs or shares held for a short time.

"The worst thing for people to do is sell," warns Anna Bowes of independent financial adviser (IFA) AWD Chase de Vere. "At times like these, they need to be supported and reassured that [their] investments are still appropriate."

Ms Bowes calls the recent market swing a "correction" and says it "is just not a big deal".

However, tell that to someone who has just invested their full £7,000 equity ISA allowance for the 2006-07 tax year in a regular FTSE 100 tracker. The decline between 12 May and 18 May will have wiped nearly £500 from its value.

The latest bout of market nerves began nine days ago when the FTSE 100 fell 129.9 points.

Concern that the world's economic engine, the US, would start to splutter because of another domestic interest rate rise prompted a sell-off of large-company shares in major economies around the world, including the UK.

Why? In crude economic terms, a higher interest rate indicates a smaller return from company shares because of the impact on these same companies, whose expansion might be hindered by costlier debt. At the same time, returns from rival assets such as bonds and cash, which benefit from rate increases, immediately become a lot more attractive.

The share sell-off continued last Monday, with the FTSE 100 dropping a further 150 points before a slight recovery - only to take another vertiginous dive on Wednesday when it fell by 170 points to close at 5,675.5.

That slide was sparked by a fresh set of gloomy figures from the US - this time, for inflation. Data revealing that growth had been stronger than imagined raised the spectre of yet another rate rise and ignited another fierce round of share dumping.

On the same day, the Dow Jones index in New York suffered its biggest fall in three years, with more downward pressure exerted by fears of a bursting bubble in prices for commodities such as copper.

Although the FTSE 100 managed to steady on Thursday and close at 5657.4 on Friday, such a dizzying ride made it difficult to recall that, last month, the index was riding a five-year high of 6,132.

But Mike Lenhoff at stockbroker Brewin Dolphin says the change in fortunes is only natural: "Equity markets have performed astonishingly well. The kind of progress they have made is unsustainable without a decent correction or period of consolidation."

So should investors be equally sanguine?

In the first instance, any worries that they might have timed their entry into the market badly should be banished.

For most people, a stocks and shares ISA should be a medium- to long-term investment of at least 10 years, and short-term falls like this are all part of the market's cycle, says Justin Modray at IFA Bestinvest.

He believes the recent convulsions will inject a much-needed dose of realism into many people's perceptions of their investments. "Over the last few years, markets have been very strong - and a lot of investors have started to forget the risks of investing in equities, and believe that everything goes up."

In the weeks before the latest downturn, he reports, some of his clients, revved up by recent gains, had to be persuaded not to put more cash into the markets.

"Provided we're not at the start of a longer-term bear market, and I don't think we are, these falls will give some people a bit of a sanity check."

Both he and Ms Bowes emphasise that, unless you regularly play the stock markets, the question of picking the right time to go into shares is irrelevant; the amount of time spent in them matters more.

Research from fund manager Fidelity underlines this point. Compared to remaining fully invested in the FTSE All-Share index for 10 years, going in and out in search of the right moments to buy or sell could mean missing out on the best 10 days' market rises over that period. Spurning those 10 days will lower your returns by a third.

"It's impossible to get the right time," says Mr Modray. Far more important, he stresses, is to build a portfolio of different types of assets - such as cash savings, property, bonds, or alternative investment funds that put your money in commercial property as well as shares. If one of the assets struggles, the others should help keep you on an even keel.

Anyone anxious about putting money into an ISA at the wrong time should drip-feed small sums in each month.

In a nutshell, you hedge your bets by buying into a fund at an average "unit" price.

Say a direct debit of £100 gets you 20 units at £5 each one month - a falling market might mean the unit costs £4.50 the next.

But while your existing units are now worth only £4.50 each, the next month you'll be able to purchase 22.2 units with the same amount of money.

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