Money: Bruised but not bloodied

It may have seemed dramatic, but it could have been a lot worse, and the real question now is: just how bad can it get?

Last week's stock market crash may have looked bloody at times, not least when UK shares dived nearly 10 per cent - a massive 450 points off the FT-SE 100 index of "blue chips" - following an enforced halt to trading on Wall Street after that market's collapse. But come Friday night, when the UK stock market closed for the weekend, shares in London were down less than 3 per cent since the start of the week, and have only fallen back to their level at the start of the summer.

The UK stock market is still up 20 per cent on the year, and for most investors the recent falls will have been small beer compared with the extraordinary profits made from soaring prices in recent times.

The falls in Asian stock markets particularly have been much worse, but many of the shares most widely held by UK investors - the privatisations and building society windfalls - look more bruised than battered (see table). One, Woolwich, is even up in price over the week, although still down from its previous high.

With hindsight many people may now be wishing they had sold their shares earlier in the summer. Had an investor managed to get out at the recent summer peak someone with investments in the UK might have been able to sell for around 10 per cent more than where shares now stand.

But that chance has gone (for now at least), and while the UK stock market is still relatively high, further panics cannot be ruled out. So what should investors be doing now, many of whom may be more exposed to the stock market than they know through pension plans and even endowment mortgages?

The advice for most people is probably to do nothing. "It may be nasty but investors should just grit their teeth," says Jeremy Batstone, head of research at NatWest Stockbrokers.

Realistically, UK shares are not expected to fall by more than another 10 to 15 per cent at most, and at such levels many people would regard them a bargain, while in the longer term they should continue to deliver good returns. If you were to cash-in a PEP you would lose the tax-free perks of that PEP for ever, while selling individual shares with a view to buying them back again in the future at a lower price is a hard enough trick for even the professionals to pull off.

David Wright, a director at Johnstone Douglas, a Croydon-based independent financial adviser, underlines this "sit on your hands" view: "The only important prices that investors need to worry about are the price they buy at and the price they sell at. The fact [is] that the only investors who make a loss in a serious stock market fall are those who cash in their investments and realise their losses."

The big exception to the "don't sell" advice is if you already needed the money, perhaps to help buy a house. Ideally you would have sold out earlier and kept your savings in the building society, but it would still be advisable to sell now to protect yourself against further short-term setbacks.

This exception apart, if instead you save into a PEP every month you should maintain these regular payments - you now stand to benefit from your money buying more shares than before. While some stockbrokers are starting to talk about bargain hunting (see below, for example), if you have a big sum you wanted to invest in the stock market it is probably wise to watch and wait for now, or accept the consequences of what would be a brave bet that the worst of the stock market's problems are already over.

The value of many pension plans will also have been hit by the latest falls. But, again, savers should not worry too much because of the long- term nature of pension saving. Keep up monthly payments although, again, think twice before committing big one-off sums at present.

In theory, endowment policies could be hit too. Not so much in terms of their current value - most endowments, although invested in the stock market, build up their value by accruing annual bonuses that are only indirectly related to the stock market's performance in that year. But investors with policies maturing shortly could see a lower final bonus than they might have hoped for. Policyholders are almost always penalised for stopping endowments early or missing payments, so don't stop your saving just because of the latest uncertainties.

Further crashes could also have unforeseen consequences for people with windfall shares. Price falls could prompt takeover bids, which in turn would probably buoy prices again and - if there was a takeover - mean that investors could offload their shares without paying for the privilege.