Published September 2002

Don’t let recent accounting scandals sideline your investment plans

If you invest in stocks or stock mutual funds, then you probably haven’t had a lot of good news over the last few months — or the past couple of years, for that matter. Of course, stock performance has always been cyclical, but recently a new wrinkle has been thrown in: corporate malfeasance. This year’s wave of accounting scandals may have you thinking of “getting out of the market.”

Before you sell your equities, though, pause for a moment and think of recent events in the context of the emotions they have stirred. It has been said that “fear and greed drive the market’’ — and the past several years have provided evidence that this is often true.

During the raging bull market of the 1990s, many new investors became enamored with the “stars” of the era, namely high-flying technology and Internet stocks. In fact, investors flocked to these investments even though, in many cases, the underlying companies were earning little or no money. Clearly, people hoped to “cash in’’ on what they believed would be a phenomenal rise in these stocks’ prices. In short, greed tended to overwhelm good judgment.

Now, more than two years after the “technology bubble’’ has burst, things are very different. The current bear market — already one of the longest in decades — is being exacerbated by investors’ lack of trust in the companies whose stocks they own. And yet, many signs point to an economy that’s on the rebound, which is almost always positive for the stock market. So it appears that, once again, stock prices are being determined in part by emotion (except this time, it’s not greed; it’s fear).

Be careful not to let your emotions dictate how you invest. Even though corporate greed and harmful accounting practices are distressing, we need to look beyond the scandals and consider the hard facts. Specifically, the series of bookkeeping debacles, while serious, is not an epidemic — it’s not “spreading’’ to other companies. That’s not to say we’ve seen the last of this type of problem. But thousands of companies — in fact, the vast majority of companies you could invest in — still work diligently to report their finances thoroughly and honestly.

Of course, you cannot be sure that any company you’re considering as an investment will forever remain untainted. You may even feel that you’re taking a “risk’’ by investing anywhere! The truth is, however, that you’d be taking a bigger risk by not investing at all. If you head to the investment sidelines, you will unquestionably miss out on some good opportunities. Remember, historically, bull markets have always followed bear markets.

So, instead of taking a “time out’’ from the market (which might feel good emotionally), just follow some tried-and-true investment techniques.

Look for solid companies with competitive products, strong management and established track records. Diversify your holdings across a wide array of stocks, mutual funds, fixed-income products and other investments.

You can’t control how a company chooses to behave. But you can control how you invest. By following these few basic guidelines, you can go a long way toward achieving your important financial goals.

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

Back to the top/September 2002 Main Menu