Markets move in cycles and as surely as the sun will rise every morning, markets that have dropped will rise again. The question is, how far will they drop and how long will it take before they start to rise?

Historically, over the last twenty years or so, falls of 10% have corrected within six months. Larger falls have taken a bit longer - perhaps 18 months or so. One of the positive aspects of a sharp drop is that the rise is usually a lot slower, giving you time to decide how you will respond.

There is always a trigger to the change in direction of the market. The trigger down was the credit squeeze, and there will be a trigger for it to rise again. That will most probably occur when share prices look cheap compared with the future earning potential of companies. Share prices are driven by two major forces - market sentiment and market fundamentals (or economic and financial performance). Now is the time to be looking for bargains, because there will be opportunities to make gains by investing in markets and companies that have solid economic and financial prospects, and which will experience a rise in price when the market sentiment changes.

One of the factors that may hold prices back is that interest rates and bond yields are very high, making bank deposits and bonds look like a good alternative to shares right now. It's the future that counts though, and there is a high likelihood that interest rates and bond yields will drop in the medium term while good economic performance will lead to higher share prices.

The New Zealand share market is not expected to perform as well as the Australian market, which is still underpinned by strong demand from China for its resources. However, funds pouring in to KiwiSaver and PIE's, which will be investing in New Zealand shares, will put pressure on prices.

It's a good time to be thinking about investing offshore. Investors have been shielded from the drop in international share markets by the drop in the New Zealand dollar. In the medium term, there could still be room for the dollar to drop further.

If you're not inclined to make the most of the market volatility by looking for bargains, your best course of action is to just sit tight and wait for the market to move through its cycle. For long term investors, this is just another market correction that will seem of little consequence in years to come.

Article by Liz Koh

Liz Koh is a financial adviser. A copy of her disclosure statement can be obtained on request and free of charge by calling 0800 273 847.

Ph: 0800 273 847

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