Bear market - should you sell or buy?

You may grizzle about the unfairness of it all but the economic outlook is pretty grim and the credit crunch and soaring living costs have combined to bring the word 'recession' into many people's lives for the first time.

The City is troubled by the continuing upheavals in the US money markets, where the quaintly named Fannie Mae and Freddie Mac, lynchpins in American mortgage lending, are the latest harbingers of financial gloom and possible insolvency.

A sinking market

Anxiety over the potential of the US fallout to clobber UK financial institutions has led to further plunges in the UK stock market.

The FTSE 100 index of bluechip shares has plummeted by more than 20% in the past 12 months, wiping some £375 billion from the value of Britain's biggest companies. The FTSE is now at a three-year low, not the happiest of locations for individual investors or pension funds.

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Continually falling house prices have contributed to economic pessimism. The Halifax reports they fell by another 2% in June, following a 2.5% drop in May. They are now down by 8.7% from a year ago, representing, say economists, the fastest paced housing market slump since the 1950s.

Don't expect too much

According to stock market historian David Schwartz we can expect to see a recovery of London shares into a new bull market by the beginning of next year but the upturn is likely to be very weak.

The view of many City strategists is that mounting economic woes and their toll on company profits will conspire to produce more investor misery before the upturn. Faced with such dramatic falls in share prices the temptation is to sell in order to limit future losses.

This certainly seems to be the case where the public's enthusiasm for the tax-free £7,200 equity ISA (Individual Savings Account) is concerned. The Investment Management Association (IMA) has reported that £198 million flowed out of equity ISAs during the month of May as (presumably worried) investors stashed their money elsewhere. This loss is 10% higher than it was in May 2007.

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IMA figures also show that the share of overall funds held in ISAs slumped from 29.8% to 19.4% last year. 2003 was the last year when money going into equity ISAs exceeded that being taken out. IMA chief executive Dick Saunders believes the dot.com boom and then bust at the beginning of the century knocked confidence, as thousands of ISA investors lost money in funds backing early internet companies.

"The retail invetsor has yet to come back to the market since the tech crash; people have been investing in property instead."

Also there's the fact that many equity ISAs, if they began life as PEPs (Personal Equity Plans), will have been held for 20 years or so. Long term investors could now be cashing in to boost retirement income.