There's an old adage that says that when people in the market are fearful, that's when investors should get greedy and when people in the market are greedy is when investors should get fearful.

None other than Warren Buffett made that statement this week as he made major investments in General Electric and Goldman Sachs, two premier US companies. There is also little doubt that there is a great deal of fear in the marketplace as the international credit squeeze and the falling stock markets are ample evidence of this. Does this mean therefore that we should all be rushing out to add some bargains to our investment portfolios?

Not so fast. We may still be much closer to the beginning of the contraction in the markets than the end and caution should still be the order of the day. Warren Buffett spent the better part of the last year and a half building up a large hoard of cash and he still has lots of it on hand.

Furthermore, because Mr Buffett has many billions of dollars on hand, he can negotiate deals with the best of companies that most mere mortals can only dream about.

Today's bargain may be tomorrow's turkey

Falling markets may offer opportunities but they also pose special challenges and getting into them can be a bit like trying to catch a falling knife, you are not sure whether you'll end up holding the handle or the blade. The principal problem is that as the prices of stocks or bonds fall, they become increasingly attractive relative to the levels at which they traded recently and thus become more and more tempting. The real difficulty is that because prices are falling, today's bargain may look like tomorrow's rip off. In other words, the investor's challenge is to exercise enough patience to buy when prices have reached their lowest level rather than buying while they are still falling.

Of course there is no way of knowing when the market has bottomed out and is about to turn around and to make matters worse, the market seldom moves smoothly and steadily in one direction. There are the proverbial bear market rallies which are periods during a general market decline, when the market recovers and starts to move upwards for a while, only to resume its downward march once again. Investors who are enticed to buy during a bear market rally quickly regret their decision when the market rally stalls and they are often left scrambling to sell their securities before they start to incur losses.

The major economies are slipping into recession

The present environment is particularly challenging because the world economy moving from a period of strong and sustained economic growth in the industrialised world to a period of economic contraction. No one knows how long this process will take to play out but it could take anywhere from a few quarters to a couple of years for the financial markets to reflect the full effect of the economic downturn and point the way to recovery. Therefore, for the average investor, this is probably a time to sit on the sidelines and try to accumulate some cash in much the way that Mr Buffet has done over the last year or two. This is not to suggest that it will take one to two years for the market to bottom out but it is quite likely that the bargains may get better over the next six to twelve months.

There's no need to keep your money under your mattress

It is important to note that sitting on the sidelines does not mean keeping your money under the mattress or in a low yielding bank account. Investors can still access money market investments that offer attractive returns with little or no risk to principal. Bonds issued by highly rated countries and institutions could also be attractive investments at this time as they will hold their value and can be sold easily when the market bottoms out and the prospects for more risky investments begin to improve.

Charles Ross is managing director of Sterling Asset Management Ltd. Sterling provides medium to long-term financial advice and instruments in US and other world market currencies to the corporate, individual and institutional investor.

Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

Good support in Bounty Hall for Heineken's 'Bond' road show

Opera star to sing for the Ward

This is the century for the person of colour — Judge Joe Brown