Should I Invest in Facebook?

If you follow any news sources, you have definitely heard about the stock market debut of Facebook, the social networking giant.  Although I never give specific recommendations about individual stocks, the IPO of Facebook is a good opportunity to review some basic principles of sound investing.

Facebook became available for purchase to the average retail investor this morning after a long period as a privately held company.  The social networking site has over 900 million active members worldwide and is extremely well-known and broadly utilized.  For these reasons alone, many people assume that it would make a great investment.

Investing is using money or capital in order to gain profitable returns, such as interest, income, or appreciation in value.  How does a share of Facebook fit into this definition?  Facebook debuted on the NASDAQ exchange today with a market capitalization (share price x shares outstanding) of over $100 billion, representing approximately 100 times its profits from 2011.  Most publicly traded companies trade for 10 to 15 times their annual profits.  Facebook shares do not currently pay any income.  In order to achieve a profitable return, the share price would have to continue to increase.  Anything could happen in the short-run, but a long-term appreciation of Facebook shares is only possible with dramatic increases in revenue and profitability of the company.  This will require charges for services that are currently free, additional advertising that could drive away users or other new sources of revenue that don't currently exist.  Although I will never claim to predict the future, Facebook has a long ways to go until it pencils out as a sound investment in my view.

Prudent investing requires appropriate assessment of risk, diversification and discipline.  Invidividual stocks come with a risk that is too high for most common investors.  Diversification requires that an individual own many different types of investments in order to spread risks across various companies, sectors and economies.  Discipline is also required to achieve consistent, positive, long-term investment returns.  The unpredictability and short-term, emotional movements of individual stocks do not cater to the sound discipline of a prudent investor.

There are other investment considerations that I haven't discussed here, but my simple recommendation would be to use Facebook as the great social networking tool that it is and only use it as an investment in a broadly diversified portfolio.

Happy New Year!

Although the new year is just another date on the calendar, it does give us an opportunity to reflect on the past twelve months and how we might make the coming days better.  Many parts of our financial lives do reset with the beginning of the year, so I would like to offer some recommendations for improvement.

1)  Keep better records - This isn't just for the detailed personalities out there.  There is a lot of insight and power that can only come from accurate recordkeeping.  There are even simple solutions like Mint.com that will do most of the work for you.

2)  Accept the past and start fresh - Although real estate troubles or job changes might have changed your financial situation, you can reboot and develop a new financial plan for your current realities.

3)  Reduce clutter - This might include closing some unused accounts or consolidating some old investments.  Less clutter in the practical areas of our lives allows us to focus more on the things that matter most.

4)  Live life more efficiently - There are lots of small things that can be done here.  Reducing unnecessary shopping trips, replacing inefficient light bulbs or appliances and programming your thermastat are just a few.

5)  Insure the important things in life - You should not take insurable risks that could cause harm to your family in the event of an accident or disaster.

6)  Establish an estate plan - This can include a will, health care directives, and a trust.  The first step is to think about it.

7)  Think about your investments - This is an area that can be very costly when ignored for a long period of time.  Each investment involves risks and these should be carefully reconsidered periodically.

8)  Reduce unnecessary debts - There are good debts and bad debts.  Debts should be reviewed, prioritized and paid down in a smart way.  For example - pay down the debt with the highest interest rate first.

9)  Do some math - You might not enjoy numbers, but some basic arithmetic can help your financial security.  Basic assessments of income and outflows and projected future savings balances have to be done periodically to have a sense of realistic goals.

10)  Share what you have learned - Family and friends can benefit greatly from the financial lessons that you have learned through your experience.  Be a good example of healthy habits that will be observed by others.

I could list many more, but this should provide some ideas for many of you.  If this is seems overwhelming, contact a fiscally-minded friend, family member or financial professional.  They would be happy to help!

Are the Markets Making You Nervous?

Stock markets have been more volatile lately, largely due to U.S. and European debt problems.  Although these are significant problems in need of long-term, structural changes, I view investing as a long-term, disciplined process.  That being said, how does one invest for the future but also take advantage of short-term opportunities to strengthen ones financial situation.

As explained by Andrea Coombes in a MarketWatch article posted on September 23rd, there are five things that should be the foundation of any long-term investment portfolio:

Minimize Taxes - Although investment income and capital gains are taxable, there are ways to structure a portfolio to minimize or defer these taxable events.  Gains can also be offset by losses in certain instances.

Control Costs  - Any investment has a cost associated with it, but these costs can be controlled by evaluating management fees and consolidating assets to reduce fees.  Costs can often be hidden or difficult to quantify, so an independent investment professional can assist in evaluating the true costs of various investments.

Diversify - This is as simple as "Don't put all your eggs in one basket."  Investments should be across various asset classes, company sizes and economies.  A large amount of an investor's portfolio in one specific investment, concentrates too much risk in one area, unless that investment is broadly diversified itself.

Rebalance - Different asset classes will perform differently in a portfolio.  Outperformance of one asset class should be realized and then reinvested in an underperforming asset class.  This rebalancing can contribute significantly to the aggregate performance of a portfolio over time.

Be Proactive, But Patient - A plan should first be developed before investing significant amounts of capital.  This plan should include goals and the amount of risk that you are comfortable with.  Portfolio performance should be monitored versus this plan over time and changes can made, if needed.  Accomplishing long-term financial goals is a patient process, though, and no rash changes should be made based on emotions.

Although the news headlines will always affect our emotional well-being, a long-term investment plan with a strong foundation provides a stable backdrop to the ups and downs of our daily lives.

A Tribute to Steve Jobs

Considering that the world lost an icon this week in Steve Jobs, I thought I could offer a small tribute of my own.

Ever since my family purchased an Apple II computer in the early 80s, I've appreciated the products that were influenced by Steve Jobs and his way of thinking.  Technology really is just a tool people use to communicate, create, appreciate other's creations and just get things done.  I've always been excited by the way I could more elegantly and efficiently accomplish things in my life with techology, while also enjoying the process.  This has always been the case when I've interacted with something Steve Jobs influenced.

Considering that this blog is about investing, I also wanted to share some thoughts about Steve Jobs and the business world.  I recently came across this quote from the well-known management consultant, Peter Drucker:
 
"Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation.  Marketing and innovation produce results; all the rest are costs."

This is something that Steve Jobs understood at an amazingly high level.  From the time he returned to Apple in 1997 until the present, Apple's stock price increased 9,000%.  This was the effect of his focus on marketing and innovation.  As we strive to improve the American economy, we need to think of new and better ways to do things and share this message with the world.  Investing in this innovation will lead to positive returns because of the increased value that is created.  I hope that we can all get to work and be a part in making the world a better place.

Should You Save for Your Childrens' College?

Many parents of young children consider putting aside money for their children's college education a top priority.  As a parent of young children myself, I feel like the current and future education of my children is of critical importance.  That being said, everything has a cost and paying for your children's college is something that you need to be able to afford.  A popular online columnist, Emily Lambert, recently wrote about reasons that you might not want to save for college.  As a financial planner, I consistently discuss the cost of a college education with my clients and how to view this expense like an investment instead of an obligation.  I'm continually surprised when I meet parents who are willing to put up to six figures into private school tuition without any sort of idea about what this "investment" might lead to.

I recently attended a presentation by nationally-known parenting experts, Richard and Linda Eyre about entitlement.  They shared the maxim that "ownership is the antidote of entitlement and also the prerequisite of responsibility."  I feel like we should help our children own their education and future career.  As a result, they are much less likely to feel entitled and more likely to suceed.  Part of this ownership might require them to invest in their college education through savings, scholarships or part-time work during college.  Parents have many responsibilities in rearing their children.  These responsiblities often require financial outlays, but I encourage parents to evaluate their spending regarding their children in order to make sure it is leading to ownership instead of entitlement.

Government Debt and the Stock Market

The headlines the past few weeks have been dominated by political wrangling about raising the government debt limit and the related volatility in the stock market. As a financial professional, I do follow the headlines, but I also try to formulate relevant lessons that I can apply to my own or my clients' situations.

Although there was hope that the discussions between Congress and the President would lead to some significant improvements in the fiscal outlook for America, the resulting bill basically arranged financing for spending that has already occurred. Although big changes still could be coming, the lack of significant improvements in some economies is one thing that has contributed to decreases in various stock markets the past couple weeks.

I think that more people are coming to the realization that the government can't solve our problems. In America, we are our own government and the problems at that level are often a reflection of what is going on in individual homes and families. The solution is ourselves. We should individually evaluate our household finances, our debt situation, our savings and our education to make improvements. Just as America needs a new plan for government revenues and expenditures, we can each make an individual financial plan to improve our lives. It can start with small changes and eventually we'll see improvements at a higher level. Let's return to what made America great and get to work!

Do you have control of your finances?

As I talk to family, friends and prospective clients, I often hear about financial challenges. Most people have financial challenges. If not, they would almost always like to be in a better place when it comes to their financial well-being. I try to remind people that the challenges aren't always the problem. The problem is often the fact that people don't have a clear picture of their financial situation. Many people aren't even aware of what parts of their financial lives they are in control of. I'd like to review a few areas and offer some suggestions.

A good starting point is a net worth statement and a income statement. In plain English, a net worth statement is a listing off all positive and negative account balances in order to come up with the net positive or negative "net worth." An income statement is a listing of all income and expenses over a chosen period of time. Once you have pulled together a basic summary of where you are, you can start to look at what you can control to improve your financial situation.

Bank Accounts - Are you paying unnecessary fees or missing out on earning interest? Do you have adequate savings?

Investments - Are you taking inappropriate risks considering your stage in life? Do you know what you are investing in and why you are doing it? Are your investments diversified? Have you had a professional assessment of your investments?

Real Estate - Do you have the lowest rate available on your mortgage? Is your mortgage balance appropriate? Are you maintaining your home and only spending money on it in "smart" ways?

Credit Cards - Do you pay more interest and fees than is necessary? Do you even need to use credit cards to begin with? Can you reduce the balances that are incurring interest?

Other Loans - Borrowing money for purchases should be well thought out and should not be a frequent behavior.

Salary - Are you living up to your potential at work? Have you evaluated your career path and what type of spending that supports over the long run?

Monthly Expenses - Which of these are necessities and which of these are luxuries? Can you really afford all the luxuries?

Taxes - Do you take advantage of all available deductions? Do you consider the tax impact of your large financial decisions?

The Bottom Line - Are you living within your means? Is more coming in than is going out?

Gaining control of your finances takes work, just like keeping your body healthy, keeping your marriage strong and teaching your children correct principles. Like all of these things, increased financial control will expand your options in life and lead to greater peace of mind. We are all faced with challenges we can't control, but we also have the ability to take charge and chart the path we want to follow in life.