During times like the early 2000s and late 2000s, some investors abandon the stock market for good. Although some people who get burned badly discover that they’re not cut out for stock investing, everybody else should take stock of their investing approaches and adjust their practices and expectations.
In the early 2000s, the stock market began falling — with some growth stocks, especially technology stocks, plunging like stocks do in a depression. Layoffs mounted, and the September 11 terrorist attacks undermined consumer confidence. Then the general public found out that some major companies — Enron, WorldCom, and Global Crossing — pulled the wool over investors’ eyes with shady accounting techniques that artificially inflated earnings. Concerns about further terrorist attacks and war with Iraq (and perhaps other nations) hung like dark clouds on the horizon.
In the late 2000s, a global financial crisis, brought on by risky mortgage investments made by financial service companies, captured headlines and public attention. Major financial firms went bankrupt, while others required large capital injections from the government for their survival. Most global stock markets plunged in value by the largest amounts since the Great Depression of the 1930s. And the wars in Iraq and Afghanistan and associated spending lingered on and depressed the public’s mood, adding to a widening U.S. budget deficit.
There are many similarities between the early 2000s and the early 1970s, when a multitude of problems (that could not have been predicted) unfolded. The early 1970s saw record trade and budget deficits and inflation rearing its ugly head, in addition to the invasion of Cambodia, the Arab oil embargo, gas lines, and that period’s Arab-Israeli conflict — the Yom Kippur War. Vice President Spiro Agnew resigned over the exposure of his personal income tax evasion and acceptance of bribes while working in Maryland’s government.
Then news of Watergate broke, and Nixon’s impeachment hearings began. After flirting with the 1,000 level since 1966, the Dow Jones Industrial Average plunged below 600 after Nixon resigned in 1974. Many investors soured on stocks and swore off the market forever. That reaction was unfortunate because stocks are more than 20-fold higher today than they were back at their lows in 1974 (not even accounting for their dividends).
Don’t let a poor string of events keep you from stock investing. History has repeatedly proven that continuing to buy stocks during down markets increases your long-term returns. Throwing in the towel is the worst thing you can do in a slumping market. And don’t waste time trying to find a way to beat the system. Buy and hold a diversified portfolio of stocks. Remember that the financial markets reward investors for accepting risk and uncertainty.