As the global economy resets, the prospects are for lower returns and increased volatility. The US stock market took 25 years to regain its highs after 1929. Japanese stocks (down 75 per cent from their peak) and property markets (down between 50 per cent and 70 per cent) have still not recovered 1989 levels.
Governments bonds are no longer risk-free safe havens. The risk of default or loss of purchasing power through currency devaluation or diminished purchasing power is a concern. To borrow Jim Grant's phrase of Grant's Interest Rate Observer , government bonds now offer "return-free risk".
Risk premiums are frequently negative as investors flock to safe assets or the latest best investment - US and German bonds, high yield corporate bonds or high dividend stocks.
Diversification to mitigate risk is problematic as the correlation between different investment assets has become volatile. The fundamental risk of domestic shares, international shares and property is similar in the current economic environment. Even returns on cash are positively correlated to risky assets as interest rates have fallen in the recession. Tail risk - the chance of large and frequent increases and decreases in prices - is also a factor.
Investment structures also compound the dilemma. Mutual funds generate relative returns measured against a benchmark. But beating a benchmark by 5 per cent is cold comfort to investors when the market falls by 20 per cent. Only absolute return counts.