Don't try to ride it out - take advantage

THE market is well and truly in a cycle of turbulence. One day it surges, the next it slumps.

Long gone are the comfortable days of small moves and consistent progress that we had been enjoying since 2003.

This volatility is not just applied to shares; it has engulfed foreign exchange and commodities, too.

Novice investors often imagine that the known events of today drive the movements in the market tomorrow, but in reality by the time you read the news the price has already moved to accommodate the information.

Almost as likely, the emergent news was priced in before the news actually broke, because thousands of minds concentrating on profiting from the markets had already reached a consensus on what was going to happen.

However, when uncertainty is high, markets lose their clairvoyance and the result is volatility.

Uncertainty is the main driver of the current turbulence. There are many large and unanswered questions in the world markets and their resolution is bound to have a major impact on us all.

Here are a few: How high can oil go? How low can the dollar fall? Are global world real estate prices set for a crash? What will the ramifications be of the bubble stock markets of China, India and Brazil for the rest of the global economy? Will the benign efficiency of the credit markets return?

These questions generally don't lead to bullish answers, yet the global economy has been so robust in the past, it's easy simply to put faith in progress and hope things will work out.

The managers of the global economy have, over the years, done a superb job of keeping it on the rails, the shocks and slumps largely smoothed out.

This is a comfort, but good short-term management can often store up greater problems for further down the line. Just as fire prevention in forests can build up fuel for bigger fires later on, so careful medium-term economic management can dam up energy for rare but potentially massive financial disasters.

The financial fiasco at Northern Rock, for instance, is not about a company making silly mistakes, but the marginal fallout from a revolutionary change in credit, one that has benefited us all hugely over the past few years. It is a flip-side of all those fat equity balances that households have accumulated from rising property prices. The same processes that created the credit crunch also gave access to the mortgages that drive house prices.

However, new financial systems ultimately spark financial emergencies and it is nothing new that debacles like Northern Rock are the flip-side of the benefits of financial innovation.

This is after all why we have regulators; somebody needs to be able to step in and codify the new lessons learnt.

The world economy is changing at an incredible rate and there is little option between being a doomster or an evangelist of global economic revolution.

The Goldilocks economics, of "not too hot and not too cold" is dead. Clearly, a continuation of the global boom will be great news for humanity but the clouds of uncertainty are rising quickly. Just as a crisis in the US housing market swept over us here, others will follow.

What should investors do? The answer lies in caution and diversification. Rather than looking to ride good times, be prepared to take advantage of the result of bad events.

For example, at some point banks will be an excellent investment and the careful investor will be able to profit even while other market storms will roil day-to-day trading. In the end there are no profits for doomsters.

? Clem Chambers is chief executive officer of ADVFN, a stocks and shares website covering Europe.