Imagine you are in an aeroplane on a long distance flight to the other side of the world. There you are, drink in hand, cruising along at high altitude nice and smoothly, the engines humming quietly, watching an entertaining in-flight movie and with scarcely a care in the world.

Suddenly, and with little warning, the aeroplane encounters terrible turbulence. It rocks and bumps, then rapidly plunges a few thousand feet to find calmer currents while distress and panic sets in as passengers and crew fret about what fate might have in store.

What do you do? Well one thing you don’t do is jump out of the plane! You fasten your seatbelt, brace yourself and hope and pray that it will all be short-lived and that calm will soon be restored.

It is an analogy that has some resonance in the midst of the current turmoil in the global financial systems and the way people are reacting to it. For a few years now, the markets have been calm, showing steady growth and delivering good returns to investors. Now there is instability as they react to the tumultuous effect of the credit crunch on global financial systems.

The history of financial markets, however, has consistently shown that falls have always been followed by recoveries, and that a calm and measured long-term view on investment has always been the best stance to take, whatever the circumstances. When the credit crunch and the fall-out from it has become a thing of the past, those investors who did not panic or capitulate will be the ones who benefit.

So how has all of this come about? Well, the credit crunch is a reduction in the availability of loans which has been caused by a long period of relaxed and inappropriate lending, leading to bad debts and losses. It started in the USA with the fall-out from the sub-prime mortgage crisis, where loans were made to large numbers of people who defaulted when interest rates rose and repayment costs escalated. As a result, major American sub-prime lenders filed for bankruptcy.

All of this has knocked the markets, created uncertainty and clouded the short-term outlook. Banks have lost confidence in lending while individual and corporate investors have lost confidence generally. Governments, including our own, have had to step in with massive and unprecedented bail-out initiatives to shore up the banks and try to restore some semblance of order. On top of that, fears of recession in Western economies have compounded the situation.

Unquestionably, all this has provided a very stiff examination of the resilience of investors. However, investors should try very hard not to be disconcerted by short-term fluctuations and to regard investments as long-term commitments. That is not to minimise the current turmoil in the global markets, the like of which we have not seen for a very long time.

The fact is, though, that markets are notoriously difficult to predict as they have always tended to react sometimes irrationally to economic news and can be influenced one way or another by excitement or mass panic. The Wall Street Crash of 1929, probably the most devastating of them all, came at the end of the so-called Roaring Twenties, an era noted as a time of prosperity and excess.

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