To invest or not to invest? That is the question for the private investor

With press reports suggesting that legendary US investor Warren Buffet is ready to 'pounce' back into the battered stock market with a multi-billion cash war chest, how should small private investors react to the recent volatility in markets?

"Professional investors are split between those who believe that shares look exceptional value and that current markets could represent a 'summer sale' and those, like our own Ted Scott, who caution that the pain could be set to continue for some months," said Jason Hollands, of F&C Investments, a leading provider of retail stock market savings schemes.

"The answer as to whether you should invest in the markets now really depends on the timescale you are willing to stay in. Providing you are willing to commit to the markets for a long-duration of typically five years or more, we believe the returns on shares will be, as they have been historically, attractive over such a time scale," he said.

However, Hollands stated that the shorter term picture for private investors trying to 'call the bottom of the market' was extremely difficult to predict because the full extent of problems in the financial system are not yet known and will take some time to unwind.

Hollands cautioned: "We have seen days of intermittent sharp falls in markets only to be followed by dramatic bounces. This volatility will, in part, be fuelled by automated trading systems during a month when volumes of shares dealt are historically thin. You could either be a quick winner or a bruised loser if you happen to pile in on the wrong day. So for retail investors a more sensible approach might be to drip feed money over time."

F&C points out that thousands of small investors in its numerous investment savings plans, such as its Private Investor Plan, ISA and Child Trust Fund have long benefited from 'pound cost averaging' where money is invested on a regular basis across volatile markets.

"The months when shares are bought at high prices are offset by other months when more shares are bought at lower prices, enabling investors to get a smoother, average price across the year," said Hollands.

F&C illustrates the benefits of pound cost averaging by highlighting the calendar years 2000, 2001 and 2002 when the FSTE All Share Index posted returns of
-6%, -13% and -23% for lump sum savers. In comparison, monthly savers across these same calendar years would have returned +7%, +3% and -5% on the cash invested.

"None of us has a guaranteed crystal ball view of what will happen in the short-term but pound cost averaging, through regular savings schemes, can help you benefit from upside potential while softening any short term blows," said Hollands.

"There is a natural tendency when markets are volatile to shy away from investing and to be tempted back in only after shares have already risen. Regular savings provide a great discipline to just keep on going through the good times and the bad," he concluded.