Facebook’s IPO: Hitting the ‘dislike’ button
Hit that dislike button now.
“Dislike” seems to be what thousands of investors involved in the Facebook IPO disaster are thinking.
To me, I think this Facebook debacle carries with it both healthy and unhealthy lessons for the investment community.
On the one hand, it provides further ammunition to me. Ammunition to warn aggressive clients against chasing the next hot initial public offering to hit the market.
On the other hand (and more important to me) it appears that some institutional investors received a skeptical analyst’s report on the stock immediately before the IPO, and because Nasdaq’s trading systems fumbled during early trading, it will increase the level of suspicion among more-conservative investors about the fairness of the stock market.
What it Means
It may tempt them to stay away from stocks and to increase their allocations to fixed-income investments and cash and cash equivalents. Where’s that dislike button again?
This is dangerous territory.
What is dangerous to investor’s financial wellbeing is this: The urge to chase the next hot IPO and the urge to abandon the stock market due to its volatility.
It also seems rigged in favor of institutional investors.
Aggressive investors often have short memories. They forget the bad investment ideas they had and remember only the good ones.
They will remember that the investors who got in early on Google Inc. made extraordinary returns on their investments. They will likely soon forget that those unlucky enough to have received an allocation of the Facebook Inc. IPO (or who bought soon after trading began) quickly found their positions underwater.
What we do
I have worked in Forest Lake in the financial services industry for almost a quarter of a century.
I try my best to help investors, and I’m concerned that for a number of investors, this latest Facebook fiasco will be the last straw with regard to the stock market.
Even before the Facebook IPO, individual investors pulled more than $9 billion out of equity mutual funds in May alone. They were worried about the financial crisis in Europe and economic and political issues here.
And after being hit hard by the 2008-09 market meltdown, they are gun-shy. Some will return after the crisis in Europe is solved and the U.S. economy starts to stabilize.
Some will return only when the memory of the Facebook IPO has faded.
But others won’t return at all.
This is unfortunate. It’s unfortunate when the decision is made to not return to the equity market, or do with a smaller than age-appropriate allocation, especially for investors trying to save for retirement through 401(k) savings accounts and other defined-contribution plans.
The yields on bonds and other fixed income investments are so low that to make a decent return on these investments is tough. And investors possibly will suffer losses on their long bonds when yields rise as they eventually must.
Likewise, the yields on cash and cash equivalents are too low to be a sensible long-term investment for those saving for retirement.
Some plan participants may even be tempted to stop contributing to their work retirement plans when they see the balances declining because of market losses.
The equity markets have not been kind to investors in the past decade, and going forward, equity markets are unlikely to provide a 10 percent -plus compound annual returns they delivered between 1926 and 2000.
However, over the longer term, they still should provide a healthy premium over bonds, especially given that interest rates today are some of the lowest in history.
The drama of the Facebook IPO does carry lessons with it.
And all financial advisors, myself included, must work to keep our clients balanced and educated during equity market debacles.
Eventually, it will be time to click that “Like” button again.
Writer David Purdy is president of Wealth Management Midwest in Forest Lake. Securities offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
For comments or questions: firstname.lastname@example.org. Opinions voiced are for general information and not intended to provide specific advice. Consult a financial planner prior to investing. Call 651-464-2664 for more information.