The Next Financial Crisis

Remember Sarbanes-Oxley? The law, passed in 2002, set strict standards designed to prevent the accounting abuses that led to scandals and huge investor losses at Enron, Tyco and other companies. At the time, President Bush said the law represented "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt."

Yet a few years later, Sarbanes-Oxley did nothing to head off the real estate bubble and subsequent stock-market implosion, which were largely due to new-and-improved accounting gimmicks. Now, as government officials debate a new set of regulations to protect investors, I can't help thinking they're fighting the last war. The next bubble will likely come from an entirely different (and as yet unknown) source.

One thing that concerns me is that in the interest of protecting themselves by spreading their risk, investors are being urged to diversify into unfamiliar territory -- foreign currencies and emerging markets, with China being the prime example. Plus, financial engineers are already cooking up new products -- such as packages of life-insurance policies that ill and elderly people are selling for cash. At a meeting of financial counselors, one of our editors was "a little taken aback" to see the pros gravitating toward purveyors of exotic investments. And recently I read advice from a financial adviser who's putting retired clients into managed futures, a complex and risky play on commodities or other financial markets (see "Increase Your Retirement Income" for simpler strategies).

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In fact, the next bubble could be today's hot property: China itself, where the government is pumping out easy credit that's inflating the stock and real estate markets (sound familiar?).

Or maybe the next collapse will come closer to home. In a provocative interview, mutual fund manager Bob Rodriguez (or B-Rod, as he's known here at Kiplinger's) thinks the next bubble "is growing before our eyes, and it is U.S. Treasury debt."

How We're Wired

When it comes to protecting your interests, the best line of defense is -- you. Unfortunately, you're also your own worst enemy. The fascinating new field of behavioral finance has taught us a lot about how investors make decisions, and it isn't pretty. As senior editor Bob Frick writes in our cover story, "We're predisposed not just to buy high and sell low, but to cling to losing investments, ignore threats to our wealth and follow the investment herd off a cliff." And experts say we can't do much to change how we're wired, so we have to adapt.

In that spirit, our cover story gives you the tools you need to outsmart your brain and become a better investor. We lay out an asset allocation you can live with, present simple alternatives to complex investments, and buck you up with advice from Warren Buffett and other investment masters (including B-Rod).

And we don't stop there. In partnership with the Nightly Business Report, Kiplinger's will launch a yearlong series of reports, "Your Mind & Your Money," funded by the Finra Investor Education Foundation. Watch for it on your local PBS station, starting October 19.

For a comprehensive guide to making the most of the economic recovery, pick up the fourth annual edition of our special issue, Success With Your Money, now on newsstands. It will help you stay cool when the next meltdown comes.

P.S. If you're grappling with the challenge of caring for elderly family members, "There's No Place Like Home" is a must-read.

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.