Money The Fixers: Lose your head and you'll lose your money

OUCH! WALL Street is down 500 points, and the FTSE 100 is sure to follow in an equally spectacular manner. That was how the day started, and shortly after 9am the phones started ringing with concerned clients who had caught the latest news.

First on the phone was a Mr Keegan, who immediately asked the burning question: "How bad is it?"

Falling markets are very emotional for investors, especially as the televised news sensationalises the losses, which does nothing to calm investors' nerves.

"It is fine," I replied. "The FTSE 100 is only down 120 points."

"How much money will I have lost?"

"Really that all depends on where you have invested," I replied. I then discovered that Mr Keegan was not actually one of our clients but had in the past received literature from us.

"I have got a well spread portfolio, some in the UK, some in America, some in Europe and some in the Far East." A well spread portfolio is, of course, beneficial in times of falling markets but it does depend on the underlying stocks held.

"My main concern," he continued, "is a holding I purchased very recently in Fidelity ASEAN. I thought it was good to buy the Far East after it had fallen so much but now I am not so sure."

"That was a very brave move," I said. "Troubles in the Far East are by no means over, and that particular fund has a very high exposure to Malaysia which has got some fairly major political problems at present as well."

"Should I pull out and cut my losses, or do you think I should stay put." It was at this stage of the conversation that I was about to discover whether Mr Keegan was a speculator or an investor. "Did you invest in this fund and all your other funds with the long-term view in mind?" I asked.

"Yes, I do not need the money. It is there for at least five, if not 10, years."

"In that case you really should not worry, the worst thing you can do is to come out of the market at a time when it has fallen heavily. I cannot guarantee that the market will not be lower in the next few months. However, if you have taken a long-term view and do not need the money, then you should sit tight and ride the storm out."

Mr Keegan then asked about two of his other funds, INVESCO European Growth and Fidelity Special Situations. His question this time was whether, even though he has held them both for some time and made good money, he should cash them in and then reinvest the money when the market falls further.

"Both are excellent funds, and there is no need to dispose of either if they fit in with your investment strategy and you have got that long- term perspective," I replied. "Timing the market is extremely difficult. You can certainly say it is cheaper today than it was a month ago but there is no guarantee it is going to be cheaper in a few days or weeks.

"So, if you did sell your Fidelity Special Situations and INVESCO European Growth funds, you may find that you are left with cash as the market rises. Sit tight."

The big danger in playing the strategy Mr Keegan was suggesting is that you miss some major rises in the markets when sentiment turns. If you look back at market performance it is quite noticeable that, by being out of the market during a small number of days when it rises strongly, your long-term results can suffer seriously.

Despite my words and Mr Keegan's assurance that he was a long-term investor, he persisted in exploring other opportunities that might help him. He next asked: "Should I invest in a protected fund so that, if the market falls again, I will be safe?"

"I do not see any point in buying a protected fund after the market has fallen; they are for cautious investors taking a long-term view, or they can be used to lower the risk of a portfolio after a long bull run in the market," I said.

"Had you bought a protected fund when the FTSE 100 index reached 6,000, you would be doing very nicely, thank you. But you have got to bear in mind protection costs, and the performance of these funds when the market rises has, in some instances, been disappointing."

"So all told, your advice is to stay put and not move." Mr Keegan said.

"Yes," I replied. "If you have got your investment strategy right at the outset then you can ride out sharp corrections in markets in comfort."

Tim Cockerill is managing director of the independent financial advisers Whitechurch Securities, which is based at 14 Gloucester Road, Bristol, BS7 8AE (0117 9442266)