If you invest in stocks, then you probably haven't had a lot of good news over the last few months—or even the past couple of years. Of course, stock performance has always been cyclical, but now, it seems, a new wrinkle has been thrown in: corporate malfeasance. And the recent wave of accounting scandals may get you thinking of getting out of the market altogether.
Before you sell all your stocks, though, you may want to put recent events in the context of the emotional side of investing. It's been said that "fear and greed drive the market"—and there's evidence that this has been true the past several years.
During the raging bull market of the 1990s, many new investors became enamored of the stars of the era—particularly the high- flying technology and Internet stocks. In fact, investors flocked to these stocks even though, in many cases, the underlying companies had little or no earnings. Clearly, people hoped to "cash in" on the phenomenal rise in stock prices. A case could be made that greed overwhelmed good judgment.
Now, more than two years after the technology stock "bubble" has burst, things are quite different. The current bear market, already one of the longest in decades, is being exacerbated by investors' lack of trust in the companies in which they invest. 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.
You can't let these emotions dictate how you should invest. Even though corporate greed and harmful accounting practices are obviously distressing, you need to look beyond the headlines 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 that 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 individual company you're interested in will be forever untainted. You may feel that you're taking a "risk" by investing anywhere. But the truth is that you're 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. Historically, bull markets have always followed bear markets.
So, instead of taking a "time out" from the market, just follow some tried-and-true investment techniques. Look for good, solid companies with competitive products, strong management and solid track records. Diversify your holdings among a wide array of stocks, bonds, government securities and other investments. And spread out your investment dollars over time, rather than making large lump-sum purchases.
You can't control how a company chooses to behave. But you can control how you invest. And by following the few basic guidelines we've just discussed, you can go a long way toward achieving your most important financial goals.