What next? Buy or sell? Who knows?

The good news for scared investors is that pundits say solid shares can be bought at bargain prices now, says William Kay. The bad news is that they also say the hard times are far from over, and a war in Iraq will produce only a short-term blip

As the FTSE 100 index of leading shares plunged to new lows this week, millions of people who thought they had nothing to do with the stock market realised they could be affected, whether they have a pension, a with-profits policy, an endowment mortgage, a buy-to-let property, a personal equity plan (Pep) or an individual savings account (Isa). Just having a job can be risky enough, because the squeeze on share prices will make it harder for employers to raise money that could expand or simply preserve jobs.

The market was jittery enough last year, taking the index to 3630 in the summer. But then investors were lulled into a false sense of security, prompting many experts to predict the bear market was over and sunnier times lay ahead.

That has been replaced by a grimmer foreboding, as life insurance companies are forced to sell shares and consumers come under pressure to repay debt when tax increases are soon to take effect. Then there is the inevitable uncertainty as President George Bush and the Prime Minister, Tony Blair, take turns to issue successively more strident threats to President Saddam Hussein.

This week's falls were steep enough to make many people ask how much longer can this go on and how much further can shares go down?

Dr Martin Alcock, an information systems consultant from Olney, Buckinghamshire, who works for Bedfordshire county council has invested in a portfolio of Jupiter unit trusts, ranging from income to global technology. He said: "I'm fairly relaxed about the market, because I have a relatively long time horizon: I'm investing to build up a pension pot in five years, when I'll be 55. It would be a different matter if I needed the money now. I deliberately diversified my investments into about 50 or 60 unit trusts and investment trusts, but there is not much that can protect anyone in this market. But I am pleased I went into the Jupiter income fund, because by reinvesting the dividends that has stock up better than the market as whole."

Edward Bonham Carter, the head of Jupiter Asset Management, said: "Forecasting the timing and extent of any war is difficult, and markets are falling instead on sentiment. With most wars of the 20th century, market weakness preceded the outbreak of hostilities. History may not repeat itself, but as Mark Twain said, it tends to rhyme. Investors should not panic. There's no doubt people have been scared by recent market falls, but precisely because of these falls, many UK shares now represent far more of a reason to buy than a reason to sell. We believe that, with the market yielding 4 per cent, UK shares represent historically good value against cash and bond yields."

Superbears are thin on the ground, mainly because so many commentators confidently predicted last autumn that the worst was over. But several experts contacted by Your Money were decidedly cautious.

Graham Spooner, investment director of the Share Centre, thinks the index will fall to 3200, and is revising down his previous year-end forecast of 4450. He said: "I am convinced military action will come and that is the key in the short term. Ahead of that, the market will drift and people will stay on the sidelines. If military action is swift and successful, we could see a significant relief rally, but I have a horrible feeling that we will drift sideways again. It's very foggy."

But Trevor Green, head of investments at Allianz Dresdner Asset Management, thinks the market is near the bottom. He said: "We have this extraordinary situation where actuaries rather than fund managers decide where the market goes, because they are making the life insurers rebalance their portfolios by selling shares. This is frustrating, because the fundamentals are looking attractive. The other issue is the weakness of the pound and US dollar."

Mr Green's advice is to take a long-term view, and stick to investing in companies you understand. And do not buy just because you think the market has bottomed. He said: "I think we are there or thereabouts. We must be getting through most of the life companies' rebalancing, and there are good yields to be had from excellent companies, such as GlaxoSmithKline on 3.5 per cent. But a prolonged war in Iraq would go down very badly."

Ralph Brook-Fox, UK investment manager at Britannic Asset Management in Glasgow, is confident the stock market is cheap, because of the yields on shares relative to bonds and the extent to which the London market has underperformed Wall Street.

He said: "The selling has been predominantly futures-driven, which is why the FTSE 100 has underperformed mid- and small-cap shares. Speculators have sold futures contracts and the buyers have had to sell short to cover their positions. But it is hard to predict where the market is going. If anything, we should have already hit the floor. But if company earnings tanked, then all bets are off."

Percival Stanion, chairman of Baring Asset Management's Strategic Policy Group, agreed. He said: "A long, drawn-out war would clearly be negative for investors. But we could see a relief rally if the situation was resolved quickly and easily, most likely in the first half of the year. Our relative preference is still for equities. Valuation tools show equity markets are looking cheap, and offer the best combination of risk and reward for investors prepared to take a medium- to long-term view.

"We do not take the threats from North Korea seriously, since the regional powers there would not tolerate conflict and without their support the US would not attack. But the anticipation of conflict is negative for the markets and the economy. Consumers are holding back on spending and businesses are delaying capital investment while this threat hangs in the air."

Paul Kavanagh, a director of the London-based stockbroker Killik & Co, believes we are in uncharted territory. "The Iraq war is a by-product of the market rather than the other way round," he said. "Less prosperous conditions lead to conflict. I would rather let the market tell me when it has bottomed, even if that means missing the first 15 or 20 per cent. You lose less that way than getting in too early."