KEY POINTS:
As share prices head south that 8.25 per cent guaranteed interest in the bank could be looking better by the day.
But investors need to take a long rational look at why they are in the sharemarket and what their saving goals are before jumping ship, the investment experts say. Now is a time for cool heads. In most cases the best course of action is to sit tight.
For Goldman Sachs investment manager and keen psychology researcher Mark Warminger, the panic of many investors comes as no surprise.
He says there are three phases in the investment psychology cycle - greed, fear and panic.
"Investors have been quite greedy over the last year, they have forgotten what risk is about. We are now going through the fear stage - there has been a significant slowdown around the world and the US is heading into a recession. People are seeing a lot of negative newsflow at the moment and are selling on the back of that."
But, he says, investors need to remember that the stockmarket goes up as well as down and while we are in the middle of a correction, the economy is still in a pretty good shape and over the long term shares generally outperform other investment types.
Brook Asset Management managing director Mark Brighouse says many investors feel compelled to do something when the market falls.
But the best move may be to do nothing at all or to go one step further and buy more of the stocks you like.
"People feel they need to do something, they need to take action - they certainly should review what they have got. But what the professional investors are doing is using this as a buying opportunity.
"There are some stocks we would like to buy but in the past they have been too expensive relative to their value. In the sharemarket you do see times when stocks get caught up with a great deal of pessimism and it's an opportunity for people to look for stocks which they would like to buy."
He says selling all your shares and banking the money now with the plan to come back to the sharemarket later can be fraught with difficulty.
"You don't know when to get back in and might never do so. The news could continue to say that markets are doing badly - people will be saying thank goodness I got out when I did - but when the news starts to turn positive, it will be too late by then, the markets will be on their way back up and you will have missed your chance."
Brighouse says investors should have a long-term strategy in place and they should stick to it no matter what the volatility is.
"When you talk to clients about reasons for people losing money - such as adjusting their portfolios too often - they agree, but when caught up in the turmoil they do it again and again."
Spicers senior financial adviser Jeff Matthews agrees that the worst thing investors can do is panic and run for the hills.
"People are feeling the pain at the moment but at the moment it's a paper loss, if you cash up it then becomes a real loss. If you follow the same theory in the property market we should all be selling our houses right now. Why should you treat these investments differently?"
He says volatility is a part of investing in the sharemarket and a good financial adviser should explain that to their clients before they start investing.
Instead, investors who feel concerned should take the opportunity to reassess their situation, Acumen financial adviser Lisa Dudson says.
"They should think about their financial position and why they invested in the first place. They need to think about the big picture and ask questions like 'Am I well diversified? Is my risk profile the same or has it changed? Are the companies I am invested in right - do the fundamentals still stack up and does the reason for investing in them in the first place still exist?"' Dudson says a downturn in the markets is all part of investing in shares.
"That's just life - that's just what happens in markets."
She says getting advice, even if you just want to check you are on the right track, can be a good idea. "In a positive market it can be hard for people to see the downside. But now is a good time to ask if you can cope with the risk level."
For those who decide their risk is too high it might mean they need to decrease the amount of shares they hold and increase levels of fixed interest or cash investments.
Beating the bear
During the next week the Business Herald will run a series on how to withstand challenging financial times with tips on which shares could suit different risk profiles, options for investing in commercial and residential property in a sagging market and other investment opportunities.
* MONDAY: The defensive stocks.
