Sam Dunn: Even in stormy markets, one investor's panic sell can be another's shrewd buy

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The Independent Online

A slightly panicky friend cashed in an equity individual savings account (ISA) last week. His brother, on the other hand, invested roughly £2,000 in one.

Their motives mirrored each other – to make what they thought was the best use of their cash – and were prompted by the same event, the seesawing stock markets.

So who was right?

The answer is that it's the wrong question to ask.

Knowing when to buy and sell, and what kind of funds or shares to get involved with, is the biggest conundrum facing City analysts, fund managers, stock brokers and researchers every working day. But for most ordinary investors, the most important question is: "Why you are in the stock markets in the first place?"

It's hardly a secret that different reasons for investing in the stock markets require different attitudes and mindsets, yet too many people stick money in an equity ISA or buy a job lot of shares without really knowing what they want to achieve by doing so.

Often, their family or friends have suggested it as a way to simply use up spare income. Or an advert – usually depicting some sort of glossy dream image of making mega-profits – in a magazine or newspaper has caught their eye and sparked a decision to take a punt on the latest fad fund: commercial property funds, emerging markets or China, say.

I've walked into this trap myself.

In early 2000 – well before I developed a proper and professional interest in my personal finances, I hasten to add – a good friend kept eulogising his latest ISA fund and how he'd made nearly £1,000 profit over the past eight months or so.

Sucked in by his enthusiasm, and keen not to miss out on the financial party that he was so clearly enjoying, and despite my large debts that I should have paid down, I invested in a similar fund that looked pretty whizzy and sat back to watch the returns roll in.

You'll have guessed that I didn't see any for years – three and a half, I think – as the FTSE 100 began its long downward march after the dotcom bubble burst and 11 September 2001 put paid to plenty of market confidence.

Only after the Iraq war, in March 2003, did the FTSE 100 begin to climb back, and only then did I begin to get any kind of performance in the fund.

Hundreds of thousands did the same, and many won't forget how the seemingly unassailable stock market rises suddenly crumbled and left their investments looking rather threadbare.

What I should have done was stop and think about why I was investing – pure greed – and what I wanted out of the deal – instant riches – and, hopefully, I'd have realised my folly and thought again.

In theory, a trip to an independent financial adviser might have put the brakes on. But the prevailing attitude at the time – "fill your boots before somebody else does" – would probably have seen a recommendation for some sort of lower-risk fund, and, anyway, the adviser would have been eager to pick up my commission.

The upshot, to quote an adage beloved of the wiser financial advisers, is that it's "time in the market, not timing" that is more important.

An equity ISA is a long-term commitment of at least five to 10 years in order to ride out storms like those that engulfed the markets last week. They're designed to bolster a pension; build up long-term savings; generate funds for a child's university costs; act as a pot of emergency rainy-day money.

Anybody keen to play the stock market should opt for shares or even more esoteric vehicles such as contracts for difference that allow you to try and make money on share-price movements without buying the equity itself.

However, that's not to say that you should pick an equity ISA fund for your long-term goal and leave it to tick over. Monitor its fortunes compared to those of rivals (on websites such as www.trustnet.com) and be prepared to switch into different funds if it persistently underperforms its benchmark.

Practicality, not panic, is a better watchword.

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