Shares and Bears - what should investors do now?

After another day of wild gyrations on world stock markets and a cut in US interest rates, what should investors in shares be doing now? The answer may well surprise you. "Do nothing!" It is always tempting to move out of a market when things are looking uncertain but timing your market moves is difficult at the best of times. Selling at the first sign of a downturn can be especially bad news.

Time, not timing, is the key factor in stock market investment for private investors. Buying when others are selling and holding on to your shares for the long term is the best strategy. Too often, private investors are too quick to sell when markets turn down - all that will do is lock in your loss.

One simple way to reduce your exposure to the volatility of the market is regular investing - putting in small amounts of money on a regular basis allows you to benefit from pound cost averaging . Even if you have large lump sum to invest, you can split it into instalments and drip-feed it in to the market.

Want to track your investments? Moneyextra's free portfolio service has all the tools you need.

After falling 323.5 points on Monday, 21 January 2008, the FTSE 100 share index in London rebounded up 161.9 points, clawing back just over half the previous day's loss (see our end of day stock market report).

The FTSE 100 finished up 2.9% in the highest trading volume since October 2007 but in early trading had been down by as much as 4.3%.

The New York Stock Exchange, which had been closed on Monday for the Martin Luther King public holiday had an equally volatile session. At its session low, the Dow Jones Industrial Average index was down nearly 465 points but ended the day showing a loss of 'just' 128.11 points or 1.06%. It was the Dow's first close below 12,000 since 3 November 2006 in the fourth-highest trading volume on record and the fifth trading day of losses in a row for the US stock market.

Want to keep track of how the stock market is performing? See top shares at a glance.

Stock market Armageddon postponed?

Has the bear market been averted? For now and only just; the standard measure of a 'bear market' is a downward move of 20% from a market peak. The Nasdaq index in the USA finished the day 19.8% off its October 2007 peak - with the bear breathing down its neck - while the Dow is 15.5% off its closing high, also set last October.

Uncertainty remains a key factor in the US market with credit crunch ripples now affecting specialist insurers as well as banks. Companies such as Ambac, MBIA and ACA may be unfamiliar names but they will become more widely known. These firms insured the credit-worthiness of many of the structured bonds that have been unravelling - their business model is now under serious pressure.

Market fall-out on Tuesday, 22 January 2008, could have been and probably would have been much worse but for the US central bank, the Federal Reserve's 'surprise' decision to slash interest rates decisively before the US market opened by 0.75%, taking the key federal funds rate down to 3.5%, its lowest since September 2005.

It was the biggest cut in US interest rates for more than 23 years, the biggest move since November 1994 (when the Fed raised rates by the same amount) and the first cut between scheduled policy meetings since 17 September 2001, the first day of trade for US markets in the immediate aftermath of 9/11.

See also:London shares - bye, bye, bye or buy, buy, buy?

Moneyextra's Investment Centre contains all you need to know about investing in the stock market.

23 January 2008 © Moneyextra.com

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