KEY POINTS:
The first days of 2008 are providing New Zealand investors with a real test of character.
While the local economic outlook hasn't changed in any significant way, the New Zealand market has been thrust into the thick of an increasingly dramatic correction.
This is is definitely not a stockmarket crash, but the incremental nature of the downward slide makes it particularly unsettling.
Even for those who are in the market for the long haul, waking up to bad news from the United States every morning isn't fun. "How far has it fallen now?" is a just natural human response.
There are two extreme reactions to bad news, neither of which provides a useful way forward. One is to panic and view this correction as some sort of terminal slide. The other poor option is the ostrich approach.
Ignoring the news because it is too depressing won't add to your investing options.
Cancelling your newspaper subscription - as one property sector blogger recommended this week - isn't going to make the US credit crisis go away. However unpleasant the news from the US is, it is important to stay informed. But it's equally important to put the information in context.
The default advice from professionals will be to keep focused on long-term savings goals. Market performance measured over 10- and 20-year periods makes even slumps like 1987 look insignificant.
A typical analogy is that changing queues at the supermarket seldom gets you through the checkout any quicker.
But then, occasionally there are times when that strangely dressed gentleman trying to buy his groceries with a bag of 20c pieces does warrant a quick shift sideways. One reason for keeping up with the play is that there will eventually be buying opportunities. Some might argue there already are.
When the US funds get their cashflows back in order, you can bet they will be bargain-hunting.
The big risk for New Zealand is that if local investors follow the US lead and exit the market, we will leave our best companies seriously undervalued and vulnerable to takeover - just as we did in the fallout from 1987.
When the US buyers come back into play they could snap up the likes of the Fisher & Paykel firms or even Fletcher Building for a song.
If local investors really have learned a lesson from 1987 - as we all so loudly proclaimed on the 20th anniversary of the crash - then we shouldn't fall in to that same trap. But for now let's keep the message simple. Don't panic, Captain Mainwaring.
