So can prudent diversification save us from another lost decade as it saved the prudent investors like Vanguard, Rob Arnott and Hulbert's top newsletter advisors? Maybe. But there are some troubling new colors in the picture as we begin 2010. The Financial Times refers to it as the "doomsday cycle."
Writing in an opinion piece for the paper on January 19, 2010, Peter Boone and Simon Johnson suggested that the Western nations are now behaving much like the USSR in the final years of communism's decline. "Soviet bureaucrats argued for futile tweaks to laws that would crack down on speculators and close 'loopholes,' "they write, rather than biting the bullet and starting over from scratch.
The article claims that our financial system is going through the same futile motions and running a doomsday cycle with proposed little tweaks like the bank tax. When the system fails, "we rely on lax money and fiscal policies to bail it out," the authors say, which teaches the players that they should take big gambles and earn a lot of money. "And don't worry about the costs-they will be paid by taxpayers (through fiscal bailouts), savers (through interest rates cut to zero) and many workers (through lost jobs). Our financial system is thus resurrected to gamble again-and to fail again. Such cycles have been manifest at least since the 1970s and they are getting larger."
What an interesting time to be a financial advisor!
Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.