Facebook Fever

As I write this blog, Facebook is set to begin trading any minute, with the estimated 11:15am start time approaching.  The fact that web sites are breathlessly reporting the status of the stock’s IPO on a minute-by-minute basis speaks volumes about the public’s interest in the company.

Facebook is a great example of the emotional side of investing.  It’s fun to own a company that everyone’s talking about, that you use personally, or you see jumping up in value the way Apple Computer did over the past 2 years.   We all want to be associated with a winner because it makes us feel like winners too - nothing wrong with that.  But IPOs can be tricky investments based on their history of spiking in the short term, then dropping significantly in price when insiders are permitted to cash out later.  One of the best overviews of the pros/cons of investing in the company actually came from a tongue-in-cheek letter from the Founder and CEO, Mark Zuckerberg, posted on the Borowitz Report.   

The better lesson to take from Facebook, Apple and others is how technology is driving innovation in the US; and we probably won’t know where the next big thing will come from until it’s already here.  In a Wall Street Journal op-ed published May 17th, The Future is More Than Facebook, the publisher of Forbes pointed out the time to make big returns in social media has passed, but there are newer, more exciting technology breakthroughs in the works: Google’s robotic driven car, robotic manufacturing, and high-tech horizontal oil drilling. These technologies will drive down the cost of providing goods and services, improve our quality of life, and create wealth.  But the path to get there will be messy.  How many companies begin with a great idea, but can’t find a way to make money with it?  Or make lots of money at first, then get run out of business by the next competitor who figures out a way to do the same thing, only better (remember Compaq computers?)  It’s impossible to consistently predict the winners in advance. 

But if you own a diverse portfolio of companies, odds are you will participate in the next big thing.  If a few of them collapse on their path to greatness, your retirement dreams will not be crushed in the process, but you’ll still participate in the overall growth of the economy.   It’s not as exciting as buying Facebook on the day of its IPO, but it’s a better plan to get rich. 

If you really, really want to own shares of Facebook just to be a part of it, wait until all the hoopla dies down, because the price will probably be lower then.  On the other hand, you could simply print out the stock certificate published by MAD magazine, and keep yourself broadly diversified in a wide range of companies, knowing the ‘next big thing’ is probably already on its way to your portfolio.

Jeannette A. Jones, CPA, CFP®

jjones@taaginc.com

www.taaginc.com

The Benefit of Perspective

It's official. I'm getting older.

I blew my right knee out 2 weeks ago at the gym and have to have surgery to repair it, and I‘ve caught myself saying things like ‘back when we were kids….’

But there’s an upside to getting older too. My husband and I enjoy our adult kids, and our second grandson is due any day now. I love my job. Life is good.

Getting older has also given me the perspective to deal with the financial environment we’ve been experiencing since 2007, and the daily gyrations of the market this year.

In October 1987, the stock market dropped 20% in one day. Can you imagine seeing a 2,200 point drop in the Dow Jones Industrial average cross your computer screen today? We baby boomers were between 41 and 23 years of age then, so we still had years left to work, or we were just getting started. As one client put it, ‘I didn’t have any money then, so it didn’t really matter to me.’ Now it matters to us, because the first of the boomers turned 65 this year. As we retire or approach retirement, the daily drops and dismal economic reports create much more anxiety than that drop did 24 years ago. You add the technology bubble of 1999 to 2002, the Great Recession of the last four years, and many of us are beginning to feel picked on.

I get it. But the Dow Jones was 1,738 after the Crash of ’87, and it closed at 11,433 today as I write this blog. Our economy has grown, and the world outside the US has grown even faster. We have benefited from it financially during our lifetime. We need to understand that what we are going through now is not unusual, it's just happening to us at a time when we are feeling especially vulnerable.

Market climbs and drops will continue to happen in the future, maybe with even more regularity and severity with the speed of technology and change that exist today. But before you rush for your Maalox, consider that we will be retired for nearly as long as some of us worked. We have to have exposure to stocks to benefit in the same way we did over the 30 plus years of our working lives. We won’t be spending it all in one year, and we shouldn’t be viewing our investments as a month-by-month test of returns.

As we say time and again, the most important issues to focus on are those that we can control:

1. Do you have a plan?
2. Are you diversified?
3. Are you spending at a rate that is reasonable for your resources? 

If you have those three issues under control, you can turn off your TV, put your investment reports away, and get on with enjoying your life. That’s what you’re supposed to do when you get older.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

"This Time is Different"

The last few weeks I’ve met with clients and prospective clients who are very afraid of where our country is headed due to the climbing Federal deficit, the fall in interest rates, and the decline of the dollar vs. other currencies. Some have purchased gold or silver as a hedge against the anticipated fall of US stocks. I understand their concerns, and they are not unfounded.

One of the benefits of getting older is the perspective it provides, especially when it comes to investing and people. (Others might say I’m just getting crotchety, but I digress.) Looking back over the last 23 years, I‘ve heard “This time is different” a few times before.

In 1988, when I started The Asset Advisory Group, people were shell-shocked from Black Monday: October 19, 1987, when they saw the Dow Jones Industrial average fall over 22% in one day. As I worked with worried people to adjust their financial plans for retirement, they told me things would never be the same, because investors would not put their money in the stock market again and it would stay depressed as a result. “This time was different.” Those who invested in bonds and CDs based on their feelings missed the Dow’s climb from 1,739 on October 1987 to 3,975 on February 1994 – a 129% increase over less than seven years.

The fall of 1999 I spent talking with investors who were upset with our philosophy of portfolio diversification. After nearly four years of watching every dot.com provide high double digit returns, they were tired of being diversified in value stocks, real estate, and small US companies. Technology stocks were making a killing, and investing in any other type of company seemed foolish. Emotions in some meetings ran high, because people felt I was keeping them from making the returns their friends and neighbors were telling them about. I would be a rich woman if I had a dollar for every person who told me we were “in a new paradigm of investing”, or “This time is different.” The tech bubble burst in 2000, and it was real estate and small cap value stocks that kept our clients’ portfolios positive in 2000 and 2001.

In 2008 people were shaken again when we experienced a global stock meltdown that was touched off by the credit crisis in August 2007. The bad news dragged on through March of 2009, and comparisons to the Great Depression were made daily. “This time was different.” People were scared, angry and some wanted to move all their investments to cash and get back in when they felt better about the market. I felt a great sense failure when I could not convince one of my long-time clients not to sell out. But clients that kept the faith in the long-term resiliency of the global markets allowed us to rebalance their portfolios – we sold out of bonds and bought into stocks at depressed prices. These investors were rewarded with significant gains as the equity markets roared back in 2009 and 2010, and they recovered their portfolio highs of 2007.

Now investors are afraid of our country’s budget deficit and the status of our currency; gold and silver are being sold as the investor’s solution. “This time is different. “

I agree we have tough decisions to make in this country to get us back on track, but I don’t believe we need to hoard precious metals to protect us. We need to have a personal financial plan in place and execute it with conviction, so no matter what we experience we can survive it successfully. Each financial crisis we experience will be somewhat different, and even though history doesn’t repeat itself, it sure does rhyme. Take it from a crotchety old investor.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/