Last week the Wall Street Journal published an article that (assuming it wasn't a clever satire) perfectly illustrates the train wreck that's in store for clients of mainstream money managers.

In the first-person-confessional style that's becoming popuar in the financial press, the reporter laments his diminished 401(K):

My company retirement accounts, despite what I thought was a relatively conservative mix, were down close to 35% in early March from the fall of 2007. That, in turn, forced me to do some painful thinking about how much risk I can stomach on my family's behalf, and how much money we can expect to have in retirement.

My conclusion: My longtime portfolio allocation of 50% stocks and 50% bonds wasn't safe enough. I've already begun gradually trimming back my stock position each time the market rises. When I'm done with this transition -- and it could take a couple of years -- I will have a portfolio that can better ride out storms. But it will also be a portfolio less likely to produce a big nest egg.

...For me, the market crash has been truly humbling. To be honest, I thought I had bulletproofed my portfolio a decade ago when I switched from all equities to the 50/50 portfolio. My 401(k) rode out the market downturn of the early 2000s with little damage. Bond prices rose, blotting out much of the losses from stocks.

...When the Dow neared 6500 in early March and seemed poised to drop further, I decided holding 50% stocks was simply too risky in a turbulent era. I concluded 30% was the right level. At that point, I had about 42% in stocks because of the market losses. Dropping my equities allocation to 30% would have meant selling a big slug of stocks at the bottom and locking in my losses. That didn't seem smart. So I waited for the market to rise. After the Dow rose above 7200, I sold off a bit of stock. After it topped 8000, I sold off a bit more. And I've sold some more on two other days since then when the market posted big gains.

I still have the same amount of money stashed in stocks as I had in early March, thanks to the market's rise. But I own a lot more bonds. I don't plan to resume buying stocks until they shrink back to 30% of my portfolio. It's not exactly a formula for getting rich. If stocks rocket up, I won't benefit to the same degree I would have under my old 50/50 portfolio. But I've come to the conclusion that I value minimizing my losses in bad times more than maximizing my gains in good times.

There are several flawed assumptions buried in this poor guy's story. But for now let's focus on the big one: the idea that stocks and bonds offer predictable long-term risks and returns. Financial planners base this comforting theory on the experience of the six decades since the end of World War II. To them, this constitutes the "normal" market.

The problem is that those six decades weren't normal. On the contrary, they were unique: history's greatest credit bubble. During this bubble, governments, armed with fiat currencies that they could create out of thin air, printed more and more paper each year, which made it easy for consumers and businesses to borrow and spend. Companies were able to sell more at ever-higher prices and report correspondingly higher earnings, which translated into higher stock prices. The early stages of a credit bubble are like this, with everything seeming just a little easier than it was for Mom and Dad.

To hide the effects of their depreciating currencies, governments then started massaging their official statistics (see Shadowstats.com for the real, more ominous numbers). The result was a world of rising debt and illusory price stability, in which stocks went up 10% or so each year and bonds protected their owners from the occasional recession. Hence the idea that you just have to find the right mix of these two asset classes and you'll be, as the Journal puts it, bulletproof.

Unfortunately, the fun part of the bubble is over. Today's governments have (or believe that they have) no choice but to ramp up the printing presses to prevent a cascade failure of the global financial system. This will accelerate the decline in fiat currency values beyond the power of official obfuscation. The markets will catch on, and traders will dump the dollar, yen, and euro.

Because bonds pay a fixed amount each year, they depend on the value of their underlying currency. Destroy the currency through excessive borrowing and printing, and bonds cease to be safe. Soon, even "risk-free" bonds like U.S. Treasuries will come to be seen as a trap, a sort of financial roach motel in which your savings check in but don't check out.

Which means the millions of shell-shocked investors who are behaving like the Journal reporter, loading up on bonds for safety, are about to wave goodbye to what little they have left.

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