Fear is fleeting when it comes to the market

OUR HEADLINE YESTERDAY on the stock market's performance undoubtedly reflected the prevailing mood - 'HSI falls as bird flu puts investors on defensive'.

Among the defensive is a friend who sold out his entire holdings on the market recently because he is convinced of a Sars comeback. He now wonders what to do with his money. He is not alone.

My advice (not always reliable) to him and to you if you are similarly fearful is to get out if you are really convinced of a market spook from the latest disease scare. When your investments stop you from sleeping at night it is time to be out of them and to start sleeping again.

But do not take the money too far. It does not hurt you much to keep it in cash when we are only starting to come out of deflation and opportunity will soon beckon again if share prices indeed fall. This sort of scare never lasts long, at least not in its impact on your investment portfolio.

Look at the first chart of the Hang Seng Index since the end of 1994 and you can easily pick out the major collapses. You have first the effect of the Asian financial crisis in mid-1997. It took the market more than two years to recover from that one and the only reason the bounce was rapid, illusory really, was the hoopla of the internet boom that peaked in early 2000.

Then reality set in again with continuing deflation, a continued slide in property prices and tightened consumer belts. The underlying bear market that started in mid-1997 at best only ended in mid-2003, which is about normal for an investment cycle. Take particular note that this long and pronounced setback was one that stemmed from economic and financial causes. It is these that do the lasting damage to share prices.

Now let us try the non-financial scares. Can you see the effect of the 9/11 terrorist attacks in the United States? You should just be able to pick it out from the chart. It comes in the sharp drop in late 2001.