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Some Lessons From the Facebook IPO

Roger Wohlner

I have no idea whether Facebook stock will ultimately pan out to be a solid investment. In the short term, the stock is in the red following its IPO debut. A few thoughts:

IPOs can be hit or miss. On the plus side, Google debuted in August of 2004 at $85 per share and currently trades at just over $602 per share, a handsome return for longer-term shareholders. The stock peaked at over $700 per share in late 2007 and fell to under $300 per share by late 2008 during the market meltdown.

The other side of this coin, at least so far, is Groupon. The company's shares debuted in November of last year at $20 per share, hit a high of just over $31, and currently trade at just under $12 per share. The company's business model and accounting practices have come under question in recent months.

Individual stocks can carry great rewards and great risks. I do not deal with individual stocks on behalf of my clients, with the exception of those clients who receive company stock as part of their compensation or those clients who brought individual stock holdings with them when they became clients. Asset allocation and risk control via mutual funds and ETFs works very well for my client base.

That said, there is no combination of funds and ETFs that would have provided a return anywhere near what Apple stock has over the past decade plus. However, for every Apple or Google, there is a Microsoft or General Electric. The latter two companies' stock has basically been dead money for the past ten years. Both companies have failed to beat the anemic performance of the S&P 500 Index over the past decade. Microsoft was once itself a high flier. Its stock price broke $10 per share in 1996 and rose to over $58 during 1999. The stock has languished in the $20s for most of the period since 2000, with a few brief exceptions.

Individual holdings can also be subject to event risk. An example of this was Union Carbide (now a subsidiary of Dow Chemical) after the disastrous chemical leak in Bhopal, India in 1984. The stock price dropped sharply in the wake of this tragedy.

BP's stock was almost $78 per share in late 2007, but it fell to below $30 per share in the wake of the Gulf oil spill. The stock has recovered a bit and currently hovers near $40 per share, but this is still well off of its high.

Many investors have no sell discipline. Finding a good price at which to buy an individual stock is much easier than determining when to sell it. Worse yet, I've seen too many investors who refuse to sell a stock in which they have a loss until they break even. Successful investors have sell discipline.

Whether you invest in individual stocks and bonds, mutual funds, ETFs, or a combination of these, some basic investing principles should apply:

--Invest with a goal in mind, ideally as part of your overall financial plan.

-- Diversification is important.

--Control risk.

--Rebalance periodically.

--Review and monitor your individual holdings.

While all of the hype over IPOs like Facebook's is interesting, it should be largely irrelevant to most investors.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.

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