Facebook on Wall Street

Facebook! The IPO (Initial Public Offering) of the century! Facebook will “go public,” which means that you can buy its shares just like you can buy the stock of any other public company.

Lots of people who never invested before are calling financial advisors and stock brokers to buy shares, but is this a good idea? Does it make sense to buy individual shares of Facebook for your investment portfolio? A lot of people think so, because they are comfortable and they use the product every day.

The answer to the question as to whether or not you should buy Facebook depends on your objective. If you want to speculate with your money, you may want to take a chance. However, you have to be prepared to take a loss – perhaps a sizeable loss – if you are unlucky and the share price falls.

If you are serious about long term retirement investing, and you want to avoid speculating, buying individual shares of Facebook is something that we would only consider if it falls within predetermined stock selection filters not because “that’s what all the other kids are doing”.

It is highly probable that the expected share price of Facebook will be much higher than the real value of the business. Why is that? It’s the Law of Supply and Demand. A whole lot of investors chasing a fixed number of shares tend to drive a stock’s price to artificially high levels. The price may be driven upwards initially, but after the dust settles and the hype dissipates, the price could tumble.

So what will actually happen to the Facebook IPO? I don’t know, and neither does anyone else. Why? Because to complicate matters even further, stock prices in the short term also tend to be random and unpredictable. With all of these and other forces working on the share price of a new stock offering, I think you can see why I would squarely place the purchase of individual Facebook shares into the gambling and speculating category.

So how does an investor manage and control risk? Always remember the four most important rules to successful investing, all of which we follow for all of our investment accounts:

1) Own equities (stock) and fixed income (short term bonds and money markets) according to your risk tolerance and time horizon.

2) Diversify very heavily among the equity asset classes (Many of our portfolios own more than 10,000 individual stocks allocated among all of the major equity asset classes).

3) Scheduled rebalancing of your portfolio (which results in a selling high, and buying low strategy).

4) And most importantly, stay disciplined in good times and in bad. If you have a well developed and designed investment portfolio, there is no need to second-guess yourself.

Here’s a 2 1/2 minute link to a CNN Video that addresses 10 other reasons not to buy into the Facebook hype.

http://www.cnn.com/video/?/video/business/2012/05/15/lake-10-reason-not-by-buy-facebook-ipo.cnn#/video/business/2012/05/15/lake-10-reason-not-by-buy-facebook-ipo.cnn