There is an old saying that history has a way of repeating itself. For those of you who can remember the glorious run of the stock market in the late 1990's filled with internet companies who went public faster than you can say ding ding of the opening bell on Wall Street, are we now watching the launch of DotCom 2.0 in the stock market. With Facebook going public last week with over a 100 billion dollar valuation, have we as investors and consumers learned anything about risk and investing our money? Here are three things to be thinking about when it comes to managing your money and trying to make sensible decisions for your overall portfolio.
- Understand Appropriate Risk Relative To The Time Frame You Need The Money- Even with information available to us with a click of button on the internet, I still believe investors truly don't understand risk. One of the simple ways I've described this to new investors is to use the analogy of a swimming pool. If you can remember a community swimming pool as a kid, typically there was a baby pool and a large main pool. The main pool had steps going into the shallow end which was typically one to three feet. Then the pool started to slant down to a deeper part of the pool which was typically four to seven feet. Last, the deep end would end up being ten to twelve feet and typically where you had your diving boards. The amount of investment risk you should take with you money is completely relative to the time frame you have until you need your money. If you have one to three years until you need your money, you really belong in the shallow end of the pool (the 1 to 3 feet). This means using investments like CD's, Short-Terms Bonds, etc. If you have four to seven years until you need the money, you can start to take some more risk. This means investments like medium term corporate bonds, large utility stocks, or long time dividend paying stocks. If you have ten or more years until you need the money, you can start to be more aggressive. This means investing internationally, emerging markets, aggressive stocks, or real estate. The key you need to know is that the stock market, real estate, etc. are LONG term investments and you should not venture into these types of investments if you don't have the time frame. For example, do NOT buy Facebook or other stocks if you need the money in the near future. That is like playing with fire.
- Didn't Your Mom Always Say Don't Have All Of Your Eggs In The Same Basket?- Over the years, I've seen far too many people get carried away with irrational exuberance about the stock of one particular company. While I do like the idea of owning some individual stocks in your portfolio as I think by owning stocks you'll become more astute about the stock market as a whole, it is generally not a good idea to load up on just one stock. It's funny in the past year about how many people I have seen load up on Apple stock thinking that putting all of their dollars in one position will help them get to their goals quicker. However, as we have seen time and time again, no one single company is infallible to industry risk, financial risk, competitive risk, or market risk. So as this world of dotcom 2.0 is upon us, don't get caught up in the hype of thinking one of these companies is going to be your Powerball lottery ticket the moment it goes public. They still say the average overnight success takes 15 years!
- Have You Build A Solid Foundation To Your Financial Home- What's interesting about these IPO's both in doctom 1.0 and doctcom 2.0 is that it isn't the large investor I worry about most; it's the smaller one that is the bigger concern. With easy access to open an online account, a small investor can take their life savings of a few thousand dollars and drop it all in one company not realizing the real potential downside of the stock. Worse yet, because most financial companies have 'minimum account sizes', most of these small investors don't get help building a real financial plan. For the small investor, it's crucial you pay down credit card debt, build adequate cash reserve, and have the appropriate insurance coverage's before you even think about doing a Facebook type deal. Many first time investors don't plan their financial house correctly and take unnecessary risk with their money before they build the real foundation to their financial homes.
Will history repeat itself with all of these new social media, internet, and gaming companies going public just about every other month? Sometimes to look into the future, you've got to look at adjusting your rear view mirror. Go back and do some homework at the companies that were superstars in the late 1990's and look at where they are today. You might just get an idea what will happen with dotcom 2.0.
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice
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