On a journey into the unknown, sit tight

Despite the uncertainty on the world markets, Melanie Bien argues against selling shares

Whatever you do, don't panic and sell your shares. This is the message being impressed on investors across the world following the tragic events in New York and Washington last week.

Whatever you do, don't panic and sell your shares. This is the message being impressed on investors across the world following the tragic events in New York and Washington last week.

As news of the attacks on the World Trade Centre and the Pentagon filtered through, stock markets – already depressed – initially plunged into further chaos. The global economic slowdown has been pushing markets down for the past 18 months, starting with the US. After Tuesday's attacks, the markets reacted badly, with Tokyo falling to its lowest level for 17 years. The FTSE 100, which was trading at a three-year low last Monday when it slipped below the 5,000 mark, fell a further 5.7 per cent on Tuesday.

After that, the markets recovered slightly before slumping again on Friday. The FTSE posted its worst weekly decline – 6.2 per cent – since 1987. Some shares, such as those in insurance and defence, rallied as analysts argued that the former were priced down too much in the first instance while there will be much demand for the latter. Oil and gold, traditional defensive havens at times of crisis, also rose sharply. But oil shares have since retreated on the grounds that a slump in demand from the global air industry will lower the crude price in coming months.

Until Wall Street reopens, it will be hard to tell what will happen. It is expected that the New York Stock Exchange will open tomorrow; if shares plunge, as is widely predicted, this will affect confidence in other markets. And when the US seeks revenge for the attacks, it seems set to create further uncertainty. Economists also fear that the threat of recession that existed before the attack is likely to become reality; much will depend on US consumer confidence.

The problem is that nobody knows what is going to happen. "There is a very strong consensus that the US economy is going into recession," says Mark Dampier, head of research at independent financial adviser (IFA) Hargreaves Lansdown. "But I would question how much that had already been discounted in the market before Tuesday. The market was already heading downwards. We may see a fall of 10 or 15 per cent but there is evidence in history that after an initial crisis, markets do stabilise."

Mr Dampier believes selling shares now, when the market is low, is a bad move. "You need to be careful about selling. If you are right and the market goes down, say 10 per cent, it is likely it will bounce back up past where you got out before you realise it and have a chance to get back in again. If you have a balanced portfolio, why should you change things?"

Even with short-term uncertainty, the stock market remains the best place to invest, bringing better returns in the long run than government bonds or gilts, or cash stashed in a building society account.

"Over the next three to five years, equities should still provide good returns, and [we] believe markets will be significantly higher five years from now," says Craig Wetton, chief executive at IFA Chartwell. "It is for this reason that we urge clients to adopt the long view and avoid making any rash moves. While recent events are undoubtedly a setback, we have to focus on such long-term aims."

It is only when events stabilise that prices will settle. But in the meantime it is important that investors don't panic. In fact, although it may seem difficult to think about investing when lives have been lost, now is a buying opportunity rather than a selling one.

"Now is the time to buy and accumulate," says Ken Lowes, chairman of IFA Lowes Financial Management. "It might not happen overnight, you might suffer even further losses. But markets will turn and profits will be made. It is at the bottom of the market where the most secure profits are made, not the top. However, it is at the bottom where the right decision is harder because it can get lonely when many are saying you are doomed."

Although some market watchers have been suggesting a move into defensive stocks, some of these are already quite pricey. "Do you want to pile into a sector, such as pharmaceuticals, which is already expensive?" queries Mr Dampier. "If you have a lot in cash, there is a buying opportunity in the next couple of months, but you need to opt for really good, strong shares."

Mr Dampier argues that the equity income sector boasts companies with good balance sheets. He particularly likes Credit Suisse Monthly Income, ABN Amro Equity Income and Lion Trust Income; for investors looking for a fund with a broader base, he suggests the Foreign & Colonial investment trust. And whatever you do, don't forget American unit trusts. "If you want a balanced portfolio, you must have US exposure," he adds.