Enron & Global Crossing. The next wave was Martha Stewart being accused of insider trading and scandals at Worldcom. Most recently there have been questions about mutual funds allowing hedge funds to make trades on a more favorable basis than the public at large and what many believe to be an exorbitant salary for the head of the New York Stock Exchange. Is the world full of crooks? Can anybody get a fair shake in the world of investing? The answer to both questions is yes.

First of all, the world is full of crooks. But then, we always knew that didn’t we? Not everybody is a crook, of course. In fact many would argue that the crooks are in the minority. But when they are in positions of power, a few bad guys can do a lot of damage and make a lot of noise. There is a danger of being swayed by media attention to believe, and worse yet, act as if, the fox is in charge of the hen house. I believe some reflection is in order. There is a famous quote by Lord Acton, “Power tends to corrupt, and absolute power corrupts absolutely”. There has always been, and there will always be men and women in positions of power who will abuse that power. The frenzy of the tech boom in the late 1990’s created temptations that some at Enron, Global Crossing, and Worldcom seem to have found irresistible. There is nothing new about that. They were found out, and they are being dealt with one at a time. People have been fired and are being prosecuted. Notice is being served to the business world that if you are caught with your hand in the cookie jar, there will be consequences. Will some of these people get away with less punishment than they deserve? Probably. The perfect system does not and never has existed. But we should not be convinced by the media hype that the sky is falling.

Can you get a fair shake? If you have been invested in the stock and bond markets you probably knew going in that these markets move down as well as up, and that there was the potential for abuse by some people. Nothing has changed. If it was wise for you to invest in the market prior to these events, it is probably wise for you to remain in the market. In spite of all the media attention to these scandals, the market seems to be recovering. The S&P 500 has risen more than 14% from January 1 through August 31, 2003. This does not mean, of course the market will not decline again. It never goes straight up, or straight down. But there are ways to invest that offer some protection from the downside. If all of your money were invested in Enron 5 years ago, you would be broke today. If you had all of your money invested in the S&P 500 your investment would have made you a little more than a 1% annual return over the last 5 years. A portfolio made up of equal parts of 12 different market indices would have had an average annual return of just shy of 6 ½% during that 5 year period. The point is that diversification works. When you invest in a mutual fund, you are not subject to having your investment destroyed by one company going down. A mutual fund, by law, must be invested in at least 20 different securities, and most are invested in many more than that. If your mutual fund had been invested in Enron, it would have hurt your performance, but the value of your investment would

not have been wiped out. A mutual fund is typically managed by a team of researchers and a fund manager who seek to move quickly when there is either an opportunity to capitalize from or a danger to be avoided. They do not always make the right calls at the right time, but they are in an excellent position to acquire and act upon information. If you had been invested in a portfolio of several mutual funds specializing in different asset classes, it is likely that you would have experienced even less of a negative impact, and may have even made a profit.

The news doesn’t report the millions of miles flown by commercial airlines without a glitch. They report the fiery crash. Likewise, they don’t report that there are thousands of corporations that are earning profits conducting business legitimately. They report the unusual. After all, that is what news is about. Sure there have been bad guys stealing money. There have always been bad guys stealing money, but they are in the minority. You let them steal from you again if they persuade you, inappropriately, to get out of the market. Most investors buy high and sell low. Given human nature this makes more sense than you might think. After the market has been rising for some time they decide to participate in the growth. After the market has turned down, they get scared and sell. The result is that they miss some of the rise and lock in their losses. For some perspective, if you had invested $1,000 a month into the S&P 500 from August 2002 through August 2003, you would have made an annualized return of over 23% on your investment. But you would have had to do that before you knew the market was recovering from having lost in excess of 25% & 19% the previous 2 years. The moral of the story….diversify and play out your investment strategy. You don’t have to let the thieves steal again by keeping you out of the market, if the market is where you should be.