Opportunity lies down in the dip

YOU think this is bad? Exactly 70 years ago today, on 8 July, 1932, the terrible Wall Street Crash, that had begun in 1929, quietly reached its end.

The Dow Jones had hit a low of just 41, a level not seen before or since. Shares had fallen 89% from their peak just three years before. In that time millions were ruined and two thousand stockbroking firms had gone bust.

Those which remained gave staff 'Apple Days' - one day holidays when they could supplement their incomes by selling apples in the street. In New York's patrician Union League Club, members amused themselves by wallpapering an entire room with now 'worthless' stock certificates.

Today, investors and the City are having to relearn about bear markets. For two decades, shares seemed to offer a one-way ticket to wealth. Despite Friday's rally, London and Wall Street are both down a third from their peaks. They almost certainly have further to fall.

Great bear markets last longer, and fall farther, than anyone expects. They are littered with false dawns, dangerous sucker rallies and declarations of 'buying opportunities'. But they can go on and on. Tokyo has taken ten years to fall 80%. From early 1972, London took nearly three years to fall 70%.

Nothing that happens now is new. In the Crash of 1929, one Albert Wiggin made $4m, then an extraordinary sum, by bear raiding the Chase National Bank. His day job? Chief executive of the Chase National. He still collected $100,000 a year pension when he retired. WorldCom founder Bernie Ebbers has nothing on these guys.

Bear markets are frightening - but for the private investor, concerned with long-term saving instead of short-term trading, they offer the opportunity of a lifetime. They are the times to save for your retirement, or set aside a 21st birthday gift for a new grandchild. Ironically, when the FTSE 100 was at 6500, people were piling in. Now it is down to 4600, private investors don't want to know.

The rules are simple. Buy shares cheap, hold on to them through thick and thin, and reinvest the dividends. Over the long term, shares still do better than bonds, or cash. Reinvesting the dividends is critical. They produce the bulk of long-term equity returns.

If you had put £1,000 into the London market in late 1974, when the bear market hit bottom, your investment - including dividends - would today be worth £130,000. Anyone who put $1,000 into Wall Street 70 years ago, and hung on, has bequeathed their grandchildren well over $1m.

One City strategist, who avoided the slump by holding mostly cash for two years, admits: 'I wish the FTSE would get on with it and crash, so we can all start buying.'

How do you catch the bottom? You can't. No one knows how low the market will go. The FTSE 100 could go to 4,000, or 3,000, or lower. Markets tend to overshoot. But the further shares fall, the better your long-term returns. Fighting the psychology is the trick. If you invested £1,000 in the London market in late 1973, halfway through the crash, after one year your investment would have been worth just £500. But if you held on, today it would be £65,000.

For private investors, the simplest vehicle is an Isa-wrapped tracking fund which allows you to reinvest the dividends automatically. You can 'average' your cost by throwing money in as the market declines. The best strategist I know plans to start buying if the FTSE falls below 4,000.

Bear markets usually end when people have given up all interest in the market. By the later 1930s, members of new York's Union League club were holding kettles to the wall to steam off their stock certificates. They had become valuable again.

For five years we have been falsely advised of 'buying opportunities' by stockbrokers. If a crash comes, an opportunity will have arrived. We're not there yet, but be ready, and don't miss it.