The recent history of America’s financial markets has been dramatic. For over five years, beginning around the mid 1990s, market returns were well in excess of historic averages. The cheerleaders of the financial markets, from research analysts to financial journalists, moreover, encouraged the American public to place their personal assets at risk in a market that seemed to many simply incapable of going down. Investors were, in turn, willing to invest in the market (and in its riskiest segments), in some cases without regard to valuation, diversification or other rudimentary principles of financial economics. The rules of investing, we were assured by many experts, had changed. It turns out, after all, however, that things are not different now. Indeed, since its peak in early 2000, the NASDAQ index has fallen by over 75%. The broadly diversified, large cap S&P 500, moreover, has declined by nearly 50% from its high in early 2000. Not surprisingly, this widespread financial carnage has piqued Washington’s interest, and the first round of federal legislation directed at preventing such misfortune in the future recently passed the House and the Senate.
