Investing for the future

Challenging market conditions are likely to remain with us for some time. This affects different investors in different ways.

Those with a well-organised range of investments who can remain patient and disciplined understand that what goes down, eventually does come back up.

However, many investors understandably become nervous as they watch the value of their investments drop, wondering when it will all get back to 'normal'.

The fact is that ups and downs in stock market investing are normal. Focusing on volatility can sometimes lead us to forget that the stock market has delivered good returns over the long-term. Better than property. Better than bonds. Better than cash.

Getting your finances in order

Whatever the market conditions it's always smart to make sure your finances are in good order. This means managing your debts carefully, saving for a rainy day, putting something away for the future and generally, not living beyond your means.

Whether you are working or retired, having your finances in order will make the most of your hard-earned money and should make a big difference if times get tough, giving you peace of mind when you really need it.

The story behind recent market falls:

• In the US and UK, after the 'dotcom' bubble burst in 2000 and the events of September 11, 2001, interest rates were cut to boost the economy.
• 'Cheap credit' led to over-lending by banks and house prices rose rapidly creating a housing 'bubble'.
• Banks lent huge sums of money to consumers (including those with poor credit ratings) and banks lent to each other in complex and risky ways.
• House prices started to fall in 2007 and banks began to have trouble with their lending.
• This put some major financial companies, and the world's financial system, at risk.
• This crisis is called 'The Credit Crunch'.

What happens now:

• Governments are stepping in to inject billions in funds to prop up the banking system.
• Major economies are in recession.
• Interest rates are being cut to encourage banks to start lending again.
• Fear is driving markets making them volatile and unpredictable.

The future prospects:

• In the short-term, it's impossible to say what will happen to stock markets.
• Share prices will suffer across the board, even if individual companies' prospects are sound.
• This is likely to create investment opportunities.
• The long-term prospects for the stock market remain good.

What do market ups and downs mean for you?

As we have said, people react to market turbulence in different ways. Ideally, you will feel nothing and do nothing. As the highly respected and successful investor, Warren Buffet, put it in his own brand of humour: "Lethargy, bordering on sloth, should remain the cornerstone of an investment style."

This is because the daily ups and downs of the stock market are a fact of life when investing.

There should be no good reason to take short-term action on your long-term investments unless your goals and plans or attitude to risk have changed. The problem is that amidst the fear and despondency of stock market falls, it's easy to forget the basics.

To  find out more read 'The five traps that come with unpredictable markets'.