Whatever his intentions, the warning has done little since to stop the market in its tracks. The Dow Jones index is up 25.5 per cent so far this year, after 26 per cent last year.
For much of this year the world’s most powerful central banker has seemed on occasions to be flirting instead with the market bulls, debating out loud whether there is any evidence to support the view that something new and profound – a “paradigm shift”, in the current market parlance – has taken place in the US economy to justify keeping share prices so high.Has the rapid spread of microchip technology over the last few years made the business cycle redundant? After six years of expansion in the US economy, some would like to think so. Has there been an unprecedented step change in the productivity of American business? There is not much evidence of it in the standard numbers, but something must explain why unemployment continues to fall so sharply without yet rekindling inflation. Or is it simply that the great inflation bogey of the post-war years has been slain once and for all?That would certainly help to explain why long-term interest rates, which ultimately drive share price values, continue to fall, and why markets continue to take such a benign view of the future.Look, for example at the prices of the index-linked bonds which the US government has started to sell to investors for the first time this year. According to BZW, the break-even inflation rate on the latest issue is a little over 3 per cent: in other words, the inflation guarantee that the bonds provide relative to conventional bonds will prove redundant only if average inflation remains below that figure over the next five years.

Such calculations would have seemed outlandish even five years ago, so rapidly have inflation expectations changed.Yet, testifying this week to the House of Representatives Budget Committee, Mr Greenspan wisely reverted to his previous stance, observing that: “Financial markets seem to have priced in an optimistic outlook, characterised by a significant reduction in risk and an increasingly benevolent inflation process.”He added that it was “unrealistic” for investors to expect a repeat performance of the dramatic surge in Wall Street which has been seen over the past two years. His argument was that demand for labour is growing so fast at a time when unemployment is already so low that the point when either economic growth or inflation has to give cannot be far away.Either way it must eventually rebound into lower share price valuations. That does not mean there has to be another crash to allow the markets’ rosy view of the world to come back into line with underlying economic reality. A sudden 20-25 per cent fall in share prices, like 10 years ago, is just one option: it could be, and with any luck will be, a far more gradual process But it may do no harm to prepare yourself for such an event. The prudent, I would suggest, should already be mentally knocking around 20 per cent of the value of their shareholdings to get a fairer feeling for their worth.It may be no accident that Goldman Sachs, probably the most powerful of all the American investment banks, has been circulating a graph which shows how uncannily the market’s performance over the last three years has tracked that of the market in both 1926-29 (the three years which preceded the 1929 market crash) and 1984-87 (the three years running up to the crash of 10 years ago).

There is also an annual management charge, up to 1.5 per cent of the total value.There are over 1,500 unit trusts in the UK. They are divided into a number of categories according to their aims and the geographic area in which the funds are invested. For example, there are trusts which just invest in the UK with a view to achieving growth, income or a combination of the two aims Others invest internationally. The “initial charge” is added to the price at which investors buy units from the unit trust managers.

The investments are held in the name of an independent trustee (hence the name unit trust) who is responsible for ensuring there is no foul play.Unit trust managers generally cover their expenses and make their profits in two ways. Typically, an equity-based trust will invest in the shares of 50 to 100 companies with no single holding exceeding 10 per cent of the fund.Professional investment managers decide which shares to sell and which to add to the shareholding, with the aim of achieving the trust’s objective. This may be to maximise income, the growth in value of the units, or a combination of the two. However, there is a way of securing an instant portfolio: a unit trust.
The concept is simple. Investors’ funds are pooled and divided into a number of units, each investor receiving a number of units in proportion to their investment.

Investing in a broad range of companies reduces the risks associated with buying shares, for those that do well will, one hopes, make up for those that do not. However, it is important to remember that it does not eliminate the risk. If the stock market generally falls so does the value of a portfolio. Because of minimum charges for buying and selling, small individual shareholdings are not an economic proposition The minimum investment should ideally be pounds 2,000. The final paradox may be that the more people accept that cycles of overvaluation and crash are inevitable (as in 1987), the less likely they in fact become.. That is why we will go on having market booms and crashes – and why reason can only ever take you part of the way towards formulating a coherent investment strategy. No computer system can begin to model what the collective effect of these individual decisions is likely to be: the process is iterative rather than linear.The truth is that financial markets are inherently volatile and unstable.