This higher volatility is the direct result of increased investor uncertainty – driven by worries about the US economy, the credit-market crisis and geopolitical turmoil.

Lucien Carton, Global Product Specialist (Lifecycle and Structured Solutions) at ABN AMRO Asset Management, comments, ‘A key risk during periods of market turmoil is that increased volatility can trigger emotional and irrational investment decisions that can have a negative impact on desired investment outcomes. Particularly for investors who are investing for the long term, such as for their retirement, the impact can be severe.’

Many analysts are pinning their hopes on the actions of central banks. The dramatic three-quarter point cut in interest rates from the US Federal Reserve early yesterday (22 January) appears to have given fresh heart to traders, but it is possible that such a large reduction in the cost of borrowing may be interpreted as panic on the part of US policymakers faced with the prospect of recession.

However, Michael Gordon, head of investment strategy at Fidelity International believes that investors should sit tight and do nothing. ‘All too often private investors are sucked into a market at its peak and then exit at the bottom. Tempting as it might be to withdraw money when markets drop sharply, this merely crystallises an individual’s losses.

‘For our fund managers, the volatility has a silver lining. The sell-off brings many more opportunities for those willing to take a long-term view. Some of our portfolio managers believe that financials, one of the hardest-hit sectors since summer 2007, are beginning to look attractive at their current levels. The shares of property companies have already begun to recover after losing more than a third of their value last year.’