At the time of writing this article the Markets are showing great signs of nervousness and probably should be on Prozac.

The problem is that the Markets are uncertain as to the future and therefore have bouts of pessimism followed by optimism followed by pessimism again. Consequently, we see big swings in daily prices of securities. We know that the main instigation for this has been the "credit crunch", which is a result of a lot of poor lending decisions and too much credit being made available to people who ultimately can't afford to make the repayments.

This has been particularly the case in the USA but the contagion has spread. I do not wish to belittle the importance of the lack of credit being available as we have seen the upset, uncertainty and fear that can be caused as the Northern Rock was a direct casualty of this.

That said, the Stock Market continually goes through cycles of good times and bad times. However, the thing to remember is that unless capitalism is completely broken it will recover.

We have seen this on numerous occasions from the period around the First World War, the Great Depression in the late 20s to early 30s, the Second World War, the crash of 1987 and, most recently, the bursting of the dot com bubble from January 2000 to March 2003. In every case, the Market recovered and recovered strongly.

I missed out one important period and that was in the early 70s when Ted Heath was struggling with the unions, the three day week and oil prices went through the roof. In 1973 to 1974 the Stock Market fell by around 70% but recovery the following year was even more dramatic with a rise of over 150%.

The point I am trying to make is that corrections will occur and there will be periods, sometimes extended, of negative performance. However, the economy and therefore the Stock Market will bounce back. The question now, therefore, is what do you do if you are already invested? In this case I would recommend that you review your portfolio to make sure it is in line with your long term aims but I would not recommend bailing out.

Why?

Because it is impossible to time the Market. Further, if you miss the good days by being out of the Market then you can miss substantial opportunities. As an example of this there is a study of the Dow Jones covering the first quarter of 1981 through to the end of the second quarter in 2003. It showed that if someone had been invested all through this period, which had good times and bad times, the annualised return was 10.4%. However, if an investor was trying to jump in and out of the Market to avoid the falls but missed the best ten days in that period, their annualised return would fall to 7.7%.

Similarly, if they missed the best twenty days then it would fall to 5.8% and the top fifty days of performance missed would reduce the annualised return to 1.3%. This means that the unfortunate "mis-timer" of the Market would have lost out on 86% of the total return if they had been out of the Market for the best fifty days for investment.