At press time Alan Bollard and the world's other central bankers were in their annual meeting in Jackson Hole, Wyoming. Last year's get-together was an important turning point for global markets, with 2010's severe ups and downs looking grim for investors.
But it all changed at Jackson Hole when the Federal Reserve (or "the Fed", the US equivalent of our Reserve Bank) announced that it would embark on a second round of "quantitative easing", which was nicknamed QE2.
In short, this meant the Fed would effectively print money and use it to buy US Treasury bonds and other securities from banks and institutions.
By injecting this cash into the financial system, it was hoped that longer-term interest rates would fall, encouraging banks to increase lending, which would support business investment, as well as prop up property and share prices.
The Fed was worried about deflation, which is when prices fall, the opposite of inflation. While this sounds good in theory, it is actually quite bad for an economy and often sends it further into recession. QE2 was an attempt to generate inflation, cause the US dollar to fall (helping the export sector) and help stimulate economic growth.
And it worked, for a while. Over the following eight months, sentiment improved, the US sharemarket rallied 30 per cent, the US dollar fell, interest rates remained low and oil prices went up by 40 per cent (which contributed to rising inflation expectations).
The gold price rose 23 per cent as the US dollar fell and investors looked for currencies that a central bank like the Fed couldn't print more of.
But it didn't generate quite as much economic growth as hoped when it ended this June. So all eyes returned to Fed chairman Ben Bernanke at this year's event, as speculation mounted as to whether we would see "QE3".
Those hoping for Bernanke to ride in and solve the current global problems could be in for disappointment, with another interesting week in financial markets come Monday the possible consequence.
While we are seeing the persistent economic weakness that might encourage the Fed to take action, we have not seen the re-emergence of deflationary risks. But, more importantly, any action that does come out of this conference won't address the real problems that have led us to this position.
While the politicians have helped undermine investor confidence, high debt levels in the Western world and a long-term culture of over-spending are at the heart of the issue. Debt has shifted from the corporate and household sectors after bailouts and economic stimulus packages and has now re-emerged as government debt.
There is no easy way out of this predicament and governments have no choice but to reduce debt and bring spending levels down. New Zealand households have been doing this for some time now. While household debt here is still 50 per cent more than it was 10 years ago and more than double what it was 10 years before that, the good news is that it peaked in early 2008 and has been slowly declining since.
This global debt repayment process will take time and one side-effect will be lower economic activity. Growth will be below-average for a number of years as households and governments reduce spending, pay down debt and rebuild savings. Consumer spending will be lower, as will interest rates, corporate profit growth and investment returns.
These concerns make for a difficult environment for investors as returns from most asset classes look likely to be more modest over the medium term.
US benchmark interest rates are zero and will probably stay that way until at least 2013. Britain isn't much better at 0.5 per cent and neither is Europe at 1.5 per cent. Although local interest rates might creep up before they do in these countries, they probably won't rise as quickly as many economists were forecasting six months ago. This is great for borrowers who can pay back their debt more quickly, but it makes things difficult for those who live off their investment income.
The 4.2 per cent six-month term deposit rate that local investors are getting with the banks certainly beats the 0.2 per cent that US investors are getting from two-year Treasury bonds, but after tax the return quickly turns into 3 per cent, which doesn't even cover a year's worth of inflation. Good-quality fixed income might give investors above 5 per cent, providing a better return.
Within shares, dividend yields are actually attractive at present. A portfolio of blue-chip companies across New Zealand will generate an annual dividend yield of 6.5 per cent, while good-quality Australian shares are offering about 5 per cent.
Dividend income could be a key driver of returns from shares, as the lower growth environment makes capital gains a little harder to come by. If your share investments continue to generate strong, sustainable dividend yields, they help insulate a portfolio from market movements, as they are much more stable and predictable than changes in share prices.
Investing in shares requires a degree of risk-tolerance and also a long-term view. Over the past 30 years, the US market has delivered a return of 11 per cent a year, but over that period it has twice fallen by 50 per cent. In March 2009, having fallen 57 per cent, it quickly turned around and doubled in value over the following 18 months.
Markets often swing between excessive exuberance and excessive panic, with fair value inevitably sitting somewhere between the extremes. Many good investors take timing right out of the equation by staggering their investing over time; a good strategy in uncertain times.
Investment portfolios should have allocations to all of cash, fixed-income, property and shares. It is impossible to predict the future direction of markets and a balanced approach remains the best defence against the volatility we are seeing.
Investors also need to remember that sitting in 100 per cent cash is not risk-free. Inflation is a major risk for investors and growth assets provide much-needed protection against this. Long-term inflation protection is best provided by owning "real assets", such as shares and property, that can generate income that may increase at a rate better than inflation.
Gold can make sense as part of a balanced portfolio as well, although it should be thought of as an insurance policy, rather than as an investment. Gold doesn't generate any income, but it tends to perform well during periods of high uncertainty.
Having tripled in price over the past five years, the gold price is high. However, the recent volatility and risk-aversion could continue for some time, which could push it higher.
An exposure to gold can be achieved in several ways, such as by holding gold mining firms (which has the added bonus of providing a dividend stream), or by holding the bullion directly through a fund.
There are no silver bullets when it comes to investing and, while the current environment makes things very tough, it arguably always feels difficult and risky.
Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as personalised investment advice.