had a request. Suave and confident in front of his date, Matt said, How about the Blue Danube? The violinist responded, That was it.

Similarly, if we had the chance to request an investment climate, we might ask for a massive bull market in stocks, bonds, and real estate. We would love a setting where financial risk was rewarded almost without regard to the type of investment (even surfers could get rich in such an environment). To which the reply would have to be, That was it.

We have just lived through an atypical and unsustainable financial period. In recent decades, stock prices have risen at almost three times their natural speed limit. Similarly, interest rates have fallen toward zero, fueling the real estate market with cheap mortgages. Finally, with our massive trade deficit we are racking up enough debts to make Uncle Sam an international beggar.

None of these trends are sustainable. By themselves, however, the required changes do not mean doom and gloom. Theoretically, stock prices can rise indefinitely (albeit at a slower pace), interest rates can remain low (even if they cant decline much further), and our adjustment to a trade surplus can lead to greater employment (even if this means lower real wages).

The danger lies not in the macroeconomic adjustments we face, but in our psychology. Just as the fleeting nature of the 1960s culture surprised a defrosted Austin Powers, we are not built to recognize the unsustainable facts about our world. It is an economic truth that the financial future must be different and worse than the fantasyland of the past generation. It is a psychological truth, however, that most of us will realize this change only after it has occurred and when it is too late to find profits.

The current financial environment is kryptonite for the lizard brain. Just as superman was really only vulnerable to kryptonite, the lizard brain gets us in particular trouble when powerful trends must end. The backward-looking lizard brain is literally surprised when patterns dont repeat. The golden generation of rewarding risk has set us up for financial losses. Because our lizard brains are set up to collide with economic necessity, these are the meanest of markets.

Is It Time to Take Less Financial Risk?

When you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth. -Sherlock

Holmes

In answer to Adams question, Mean Markets suggests that none of the big three investment alternatives-stocks, bonds, and real estate-is likely to provide great returns. Based on macroeconomic analysis these traditional investments range from fairly valued to expensive. Importantly, none of them appear to be cheap.

While none of these investment alternatives looks cheap, standard economic analysis doesnt find any of them to be wildly overpriced, either. Therefore, one might conclude that we will see a relatively benign investment world.

The science of irrationality, however, reaches more pessimistic conclusions. We are built to do that which has worked, and we have just lived through an extraordinary period that rewarded financial risk. Furthermore, the single best guide to future performance is to bet on that which is unloved. Wall Street, Main Street, and both neoclassical (the rational school) and behavioral economists (the irrational school) are betting that risk will be rewarded.

In The Adventure of the Silver Blaze, Sherlock Holmes solves the case in an unusual manner. Holmess colleague, Inspector Gregory, asks, Is there any other point to which you would wish to draw my attention? Holmes responds, To the curious incident of the dog in the night-time. Inspector Gregory protests, The dog did nothing in the night-time. To which Holmes concludes, That was the curious incident.

Sherlock Holmes solved the case because of the dog that didnt bark. Similarly, the Mean Markets conclusion is that the best financial approach today might be to reduce risk. This is the opposite of the conventional wisdom. The very core of the efficient markets hypothesis is that investors who want high returns must accept high risk.

The investment that doesnt pay today may solve the current financial dilemma. Because markets are sometimes wildly irrational, the reward only for taking risk equation can be reversed. The analysis of this book suggests that now is one such time. Low-risk investments, even those that pay close to nothing today, may be the long-term road to wealth.

Financial success might require hunkering down in a low risk posture until markets become irrationally cheap. When the financial world is filled with pessimism and others are selling their risky assets, those savvy investors who are prepared will be able to scoop up bargains.

Thus, the Mean Markets and Lizard Brains answer to Adams question is that each of us should reduce our financial risk to a level far below where we feel comfortable. Our lizard brains have been fooled by the last 20 years of unsustainable gains. Thus, it is likely that we are all walking around with overly optimistic views of the world. We are taking more financial risk than we think we are, and most of us are taking more risk than we would want if our lizard brains allowed us to see the world clearly.

For those who want to take the Mean Markets and Lizard Brains advice to reduce financial risk, here are eight steps that can be taken immediately.

Risk Reducer #1: Allocate More Money to Lower-Risk Assets

Sell some stocks. Shift some money from growth stocks to value stocks. Increase holdings of cash and short-term securities.

Risk Reducer #2: Buy Some Inflation and Deflation Protection

Buy inflation-protected bonds in the form of Treasury Inflation Protected Securities (TIPS) or Series I U.S. Savings bonds. Buy the stocks of companies that make the products that might go up in price (e.g., drug companies, oil companies).

Risk Reducer #3: Buy Short-Term Bonds

Buy bonds that mature soon, sell longer-term bonds.