Investors urged not to panic but to buy on falls

Investors are being urged to look to the long term - and to buy on weakness rather than panic sell - after a week of high drama in stock markets.

A 5.5 per cent fall in the FTSE 100 index on Monday - the biggest drop for the UK since the 9/11 terrorist attacks - was followed by the US's emergency interest rate cut of 0.75 per cent.

Extreme share price swings continued, with the UK market on Thursday recording its best daily performance since March 2003.

Markets are likely to stay volatile and further big falls should not be ruled out. But for investors who can put away funds for the longer term, the recent slump is an opportunity to pick up relatively lowly-priced holdings, experts say.

The uncertainty should also favour regular investing arrangements, such as monthly pensions saving, which reduce timing risk, they add.

With the FTSE 100 having recorded its worst start to the year for a quarter of a century, few believe the turmoil is over just yet.

"It's a little bit early to say we're out of the woods yet," said Jeremy Batstone-Carr, head of private client research at Charles Stanley Stockbrokers. After the past month's price falls, there is no point in selling, he said. And with interest rate cuts potentially paving the way for recovery, "long-term investors can feel somewhat insouciant."

Industry sectors such as mining, oil and tobacco that previously appeared relatively resilient to the credit squeeze fall-out have joined in the New Year rout, and there is bargain-hunting across a range of UK blue chips.

"Private investors are seeing opportunities to buy good quality and value," said Stephen Barber, head of research at online broker Selftrade, adding that trading volumes were up 50 per cent.

Batstone-Carr said some banks, housebuilders and retailers were offering higher prospective dividend yields than their p/e ratios. However, this "nominal cheapness" of stocks including Lloyds TSB, Barclays, Barratt Developments and Taylor Wimpey did not make such shares automatic buys and in some cases dividends could be cut.

Disappointments in the upcoming company results season as well as further price volatility could provide more opportunities to buy.

Large-cap shares look safer going into a downturn, he said. Some have significant earnings in the US, and so stand to benefit from the pound potentially weakening against the dollar, while others offer exposure to higher-growth emerging markets.

Internationally, he said the US offers the best recovery potential, reflecting the extent of falls in economic activity as well as possible currency benefits for UK investors.

Japan, which has seen some of the biggest declines of any market in recent months, is also seen as offering value by some experts.

Mark Dampier, investment director of advisers Hargreaves Lansdown, said that for monthly investors, steep market falls early in the savings term actually help longer-term returns. The ideal market profile for regular investing is "U shaped", he said, allowing more of a holding to be bought at low levels, so giving greater profits when prices recover.

Halifax Share Dealing's ShareBuilder plan allows monthly investments of as little as £20 into any UK listed share. Commission is normally a flat £1.50, but is waived until June. Rival online broker Selftrade is launching a similar plan.

But for investors who are coming up to retirement and are still exposed to shares, recent price falls are bad news. For some, it may be worth delaying drawing a pension right now.